Prospectus dated 10 May 2006 (PDF 1.79 MB)

Transcription

25APR200610592030
Lottomatica S.p.A.
(incorporated in the Republic of Italy as a joint stock company)
g750,000,000 Subordinated Interest-Deferrable Capital Securities due 2066
Issue price: 100%
The e750,000,000 subordinated interest-deferrable capital securities (the ‘‘Securities’’) of Lottomatica S.p.A. (the ‘‘Issuer’’)
represent subordinated obligations of the Issuer, ranking on a liquidation, dissolution or winding-up of the Issuer senior only to the share
capital and other equity interests in the Issuer, as described under ‘‘Terms and Conditions of the Securities—Status’’ herein. Interest on
the Securities will accrue from (and including) May 17, 2006 (the ‘‘Issue Date’’) to (but excluding) March 31, 2016 (the ‘‘Reset Date’’)
at a fixed rate of 8.25% per annum, and will be payable (subject as described under ‘‘Terms and Conditions of the Securities—Deferrals
of Interest’’ herein) annually in arrear on March 31 in each year (each, a ‘‘Fixed Rate Payment Date’’) commencing on March 31,
2007 and ending on (and including) the Reset Date, except that the first payment of interest to be made on March 31, 2007 shall be in
respect of the period from (and including) the Issue Date to (but excluding) March 31, 2007. Thereafter, interest will accrue from (and
including) the Reset Date to (but excluding) the Floating Rate Payment Date (as defined below) falling in March, 2066 (the ‘‘Maturity
Date’’) at a floating rate of interest equal to six-month EURIBOR (as defined herein) plus a margin of 5.05% per annum, and will be
payable (subject as aforesaid) semi-annually in arrear in March and September in each year (subject to adjustment as described herein)
(each, a ‘‘Floating Rate Payment Date’’ and, together with the Fixed Rate Payment Dates, the ‘‘Interest Payment Dates’’)
commencing on the Floating Rate Payment Date falling in September, 2016 and ending on (and including) the Maturity Date, all as
described under ‘‘Terms and Conditions of the Securities—Interest’’ herein. Interest on the Securities will accrue at a higher rate in the
event that a Change of Control Event (as defined herein) occurs and the Issuer does not elect to redeem the Securities, as described
under ‘‘Terms and Conditions of the Securities—Redemption and Purchase—Change of Control Call Event’’.
The Issuer may, at its option, elect to redeem all but not some only of the Securities in cash (i) at their principal amount, on the Reset
Date or any Floating Rate Payment Date thereafter, or on any date prior to the Reset Date upon the occurrence of certain withholding tax
events, or (ii) at the Make-Whole Price (as defined herein), on any date prior to the Reset Date upon the occurrence of certain other tax
events or a Change of Control Event, in each case together with all accrued but unpaid interest (including any deferred interest), all as
described under ‘‘Terms and Conditions of the Securities—Redemption and Purchase’’. The Securities will be mandatorily redeemed in
cash by the Issuer at 101% of their aggregate principal amount together with all accrued but unpaid interest on the earlier of the
termination of the Merger Agreement (as defined herein) in accordance with its terms or October 10, 2006, if the Acquisition (as defined
herein) is not completed. See ‘‘Terms and Conditions of the Securities—Redemption and Purchase—Mandatory Redemption Event’’.
Investing in the Securities involves risks. See ‘‘Risk Factors’’ beginning on page 29.
Application has been made for the Securities to be admitted to the official list and to be traded on the regulated market of the
Luxembourg Stock Exchange, a regulated market for the purposes of Directive 2004/39/EC. This offering circular constitutes a
prospectus within the meaning of Directive 2003/71/EC.
The Securities are expected to be assigned on issue a rating of Ba3 by Moody’s Investors Service Limited and BBⳭ by Standard &
Poor’s Ratings Services, a division of the McGraw-Hill Companies Inc. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time and without notice by the assigning rating agency. Each rating should
be evaluated independently of any other rating.
The Securities have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended, (the ‘‘Securities
Act’’) or any state securities laws, and may be offered or sold only (i) outside the United States to certain institutional investors in
offshore transactions in reliance on Regulation S under the Securities Act (‘‘Regulation S’’) or (ii) within the United States, or to or for
the account or benefit of U.S. persons, to qualified institutional buyers (‘‘QIBs’’) (as defined in Rule 144A under the Securities Act
(‘‘Rule 144A’’)) in transactions exempt from the registration requirements of the Securities Act. For a description of restrictions on
transfer and resale, see ‘‘Transfer Restrictions’’.
Securities which are initially offered and sold in reliance on Regulation S will be evidenced by a global certificate in registered form
without interest coupons (the ‘‘Unrestricted Global Certificate’’). Securities which are initially offered and sold in reliance on
Rule 144A will be evidenced by a separate global certificate in registered form without interest coupons (the ‘‘Restricted Global
Certificate’’ and, together with the Unrestricted Global Certificate, the ‘‘Global Certificates’’). The Global Certificates will be
deposited with a nominee of a common depositary of Euroclear Bank, S.A./N.V. (‘‘Euroclear’’) and Clearstream Banking, société
anonyme (‘‘Clearstream, Luxembourg’’) and registered in the name of a nominee of such common depositary. Beneficial interests in
the Global Securities shall be shown on, and transfers thereof shall be effected only through, records maintained by Euroclear and
Clearstream, Luxembourg and their respective direct or indirect participants.
Sole Bookrunner and Structuring Advisor
Credit Suisse
Joint Lead Managers
Credit Suisse
Goldman Sachs International
The date of this Offering Circular is May 10, 2006.
TABLE OF CONTENTS
Page
Page
FORWARD-LOOKING STATEMENTS . . . . . . . .
v
TAX CONSIDERATIONS . . . . . . . . . . . . . . . .
304
FINANCIAL INFORMATION .
vi
PLAN
DISTRIBUTION . . . . . . . . . . . . . . .
318
MARKET SHARE INFORMATION AND
STATISTICS . . . . . . . . . . . . . . . . . . . . . . .
vii
INDEPENDENT AUDITORS . . . . . . . . . . . . . .
322
EXCHANGE RATES . . . . . . . . . . . . . . . . . . .
vii
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . .
322
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . .
1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . .
29
WHERE PROSPECTIVE SECURITYHOLDERS
CAN FIND ADDITIONAL INFORMATION . . .
322
PROCEEDS . . . . . . . . . . . . . . . . . . .
56
INCORPORATION
REFERENCE . . . . . . . . .
323
......
57
LISTING
GENERAL INFORMATION . . . . .
324
THE TRANSACTIONS . . . . . . . . . . . . . . . . . .
58
SELECTED HISTORICAL FINANCIAL DATA . . .
64
INDEX TO THE CONSOLIDATED FINANCIAL
STATEMENTS . . . . . . . . . . . . . . . . . . . . .
I-1
APPENDIX A: CONSOLIDATED FINANCIAL
STATEMENTS OF LOTTOMATICA AS OF AND
FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2005, 2004 AND 2003 . . . .
A-1
APPENDIX B: UNAUDITED INTERIM
CONSOLIDATED FINANCIAL STATEMENTS
OF LOTTOMATICA AS OF AND FOR THE
THREE-MONTH PERIOD ENDED MARCH
31, 2006 . . . . . . . . . . . . . . . . . . . . . . . .
B-1
APPENDIX C: CONSOLIDATED FINANCIAL
STATEMENTS OF GTECH AS OF AND FOR
THE FISCAL YEARS ENDED FEBRUARY 25,
2006, FEBRUARY 26, 2005 AND
FEBRUARY 28, 2004 . . . . . . . . . . . . . . . .
C-1
APPENDIX D: CONSOLIDATED FINANCIAL
STATEMENTS OF GTECH PREPARED IN
ACCORDANCE WITH IFRS AS OF AND FOR
THE PERIOD ENDED DECEMBER 31, 2005 .
D-1
APPENDIX E: LOTTOMATICA—SUMMARY OF
CERTAIN SIGNIFICANT DIFFERENCES
AMONG ITALIAN GAAP, IFRS AND
U.S. GAAP . . . . . . . . . . . . . . . . . . . . . .
E-1
APPENDIX F: GTECH—SUMMARY OF
SIGNIFICANT DIFFERENCES BETWEEN
U.S. GAAP AND IFRS . . . . . . . . . . . . . .
F-1
PRESENTATION
USE
OF
OF
CAPITALISATION
AND INDEBTEDNESS
UNAUDITED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION . . . . . . . . . . . .
70
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS—LOTTOMATICA . . . . . . .
79
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS—GTECH . . . . . . . . . . .
112
BUSINESS—LOTTOMATICA . . . . . . . . . . . . . .
134
BUSINESS—GTECH . . . . . . . . . . . . . . . . . .
172
MARKET OVERVIEW . . . . . . . . . . . . . . . . . .
199
REGULATORY FRAMEWORK . . . . . . . . . . . .
206
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . .
238
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . .
256
CERTAIN RELATIONSHIPS AND RELATED
PARTY TRANSACTIONS . . . . . . . . . . . . . .
257
CERTAIN INDEBTEDNESS . . .
260
DESCRIPTION
TERMS
OF
SECURITIES . . .
265
TRANSFER RESTRICTIONS . . . . . . . . . . . . . .
294
BOOK-ENTRY; DELIVERY
FORM . . . . . .
298
SERVICE OF PROCESS AND ENFORCEMENT OF
CIVIL LIABILITIES . . . . . . . . . . . . . . . . . .
303
AND
CONDITIONS
OF THE
AND
i
OF
AND
BY
Prospective investors should rely only on the information contained in this offering circular (the
‘‘Offering Circular’’). The Issuer has not authorised anyone to provide prospective investors with
information that is different. This Offering Circular may only be used where it is legal to sell these
Securities.
IN CONNECTION WITH THE OFFERING, CREDIT SUISSE SECURITIES (EUROPE)
LIMITED AS STABILISING MANAGER (OR ANY PERSON ACTING FOR IT) MAY
OVER-ALLOT (PROVIDED THAT THE AGGREGATE PRINCIPAL AMOUNT OF SECURITIES
ALLOTTED DOES NOT EXCEED 105% OF THE AGGREGATE PRINCIPAL AMOUNT OF THE
SECURITIES) OR EFFECT TRANSACTIONS WITH THE VIEW TO SUPPORTING THE MARKET
PRICE OF THE SECURITIES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE
PREVAIL. HOWEVER, THERE CAN BE NO ASSURANCE THAT THE STABILISING MANAGER
(OR ANY PERSON ACTING ON ITS BEHALF) WILL UNDERTAKE STABILISATION ACTION.
ANY STABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH
ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE SECURITIES IS
MADE AND, IF BEGUN, MAY BE DISCONTINUED AT ANY TIME, BUT MUST END NO LATER
THAN 30 DAYS AFTER THE ISSUE DATE AND 60 DAYS AFTER THE DATE OF THE
ALLOTMENT OF THE SECURITIES. SUCH STABILISING SHALL BE IN COMPLIANCE WITH
ALL APPLICABLE LAWS, REGULATIONS AND RULES, INCLUDING REGULATION M UNDER
THE SECURITIES ACT.
The Issuer, having made all reasonable enquiries, confirms that the Offering Circular contains all
information with respect to the Issuer which is material in the context of the issue and offering of the
Securities, that the information relating thereto contained herein is true and accurate in all material
respects and is not misleading, that the opinions and intentions expressed by the Issuer herein and relating
thereto are honestly held, have been reached after considering all relevant circumstances and are based on
reasonable assumptions, that there are no other facts relating to the Issuer the omission of which would, in
the context of the issue and offering of the Securities, make this Offering Circular as a whole or any of such
information or the expression of any such opinions or intentions misleading in any material respect and
that all reasonable enquiries have been made by the Issuer to verify the accuracy of such information.
The Issuer accepts responsibility for the information contained in this Offering Circular. To the best of
its knowledge and belief, having taken all reasonable care to ensure that such is the case, the information
contained in this Offering Circular is in accordance with the facts and does not omit anything likely to
affect the import of such information.
The Securities have not been, and will not be, registered under the Securities Act or the securities laws
of any state of the United States, and may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons (as such terms are used in Regulation S) except pursuant to an
exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.
The Securities are being offered or sold only (i) outside the United States to certain institutional
investors in offshore transactions in reliance on Regulation S or (ii) within the United States, or to or for
the account or benefit of U.S. persons, to QIBs in reliance on an exemption from registration under the
Securities Act (including Rule 144A). Prospective investors are hereby notified that the sellers of the
Securities may be relying on the exemption from the provisions of Section 5 of the Securities Act provided
by Rule 144A. For a description of these and certain other restrictions on offers, sales and transfers of
Securities and the distribution of this Offering Circular, see ‘‘Plan of Distribution’’ and ‘‘Transfer
Restrictions’’.
This Offering Circular does not constitute an offer of, or an invitation by or on behalf of, the Issuer or
the Joint Lead Managers (as defined herein) or the Trustee (as defined herein) to subscribe for, or
purchase, any of the Securities in any jurisdiction in which such offer or invitation is not authorised or
would be unlawful. The distribution of this Offering Circular and the offer and sale of Securities may be
ii
• Gaming Machines: Lottomatica provides information technology services for Gaming Machines.
Gaming Machines are electronic machines involving elements of skill or entertainment and risk,
and having random winnings. In the coming years, Lottomatica intends to seek to expand the
contribution of its Gaming Machines business through growth in video-lottery terminals, for which
all current Gaming Machine concessionaires in the Republic of Italy are permitted to provide
information technology services commencing in 2006.
For the year ended December 31, 2005, Lottomatica generated Revenues of A512.2 million from its
Lotteries and Gaming segment, equal to approximately 87.9% of its Total Revenues.
Lottomatica also offers the following automated payment and distribution services:
• Commercial Services: Lottomatica distributes services for commercial operators (i.e., electronic
top-up services distributed by Lottomatica for pre-paid mobile and fixed-line telephone accounts,
and ticketing for sporting and musical events) and collects payments from end-users.
• Payment Services: Lottomatica collects payments from consumers for both private sector enterprises
(i.e., for the payment of utility bills) and public sector entities (i.e., fines, local taxes and television
license fees).
• Processing Services: Lottomatica provides technology infrastructures to third parties for the
processing of transactions (i.e., car road taxes, third party electronic top-ups for pre-paid mobile
telephones, some minor taxes and loyalty programs and stamp duties printing).
Services segment, equal to approximately 11.1% of its Total Revenues.
In addition, in 2006 Lottomatica expects to launch stored value services, which consist of issuing and
acquiring services related to pre-paid debit cards.
A critical component of Lottomatica’s operations is its distribution network. Lottomatica originally
developed its network to provide on-line terminals for Lotto. Lottomatica’s various networks now
comprise an extensive real-time, on-line network, comprised of tobacconists, bars, petrol stations,
newspaper stands and motorway restaurants. Lottomatica uses its networks to distribute lotteries and other
games, provide information technology services for Gaming Machines and offer commercial, payment and
other processing services. Lottomatica maintains four separate networks for Lotto, Sports Pools and other
Pari-Mutuel Betting, Gaming Machines, and Services. The Lotto, Sports Pools and other Pari-Mutuel
Betting and Services networks and terminals also support Instant and Traditional Lotteries.
Lottomatica’s Proposed Acquisition of GTECH
On January 10, 2006, Lottomatica, Gold Holding Co., a newly formed subsidiary of Lottomatica
(known as ‘‘Holdings’’), Gold Acquisition Corp., another newly formed indirect subsidiary of Lottomatica
(known as the ‘‘Acquisition Subsidiary’’) and GTECH entered into an agreement and plan of merger (the
‘‘Merger Agreement’’) pursuant to which Holdings will acquire GTECH by way of a merger between the
Acquisition Subsidiary and GTECH (the ‘‘Merger’’), for U.S.$35.00 in cash per outstanding share of
GTECH, for a total transaction value of approximately A4.0 billion, including the assumption of GTECH’s
existing indebtedness. GTECH is a leading provider of gaming technology and services worldwide. Based
on data published in La Fleur’s 2005 World Lottery Almanac, Lottomatica believes the combined group
resulting from the Acquisition (the ‘‘Combined Group’’) will be one of the world’s largest lottery services
companies and will either operate or provide equipment or services to on-line lotteries representing
approximately 60% of the worldwide on-line lottery market based on total wagers. The Combined Group
will have operations in over 50 countries worldwide and approximately 6,300 employees. On a pro forma
basis after giving effect to the Acquisition, 2005 revenues for the Combined Group would have been
approximately A1.6 billion and adjusted EBITDA for the Combined Group would have been A682 million.
2
Completion of the Acquisition is subject to receipt of financing, approval by GTECH shareholders,
regulatory approvals, receipt of contract assignment assurance from certain significant lottery customers,
Lottomatica maintaining a pro forma investment grade corporate credit rating, and other customary
conditions.
GTECH
GTECH is a leading provider of gaming and technology solutions worldwide with U.S.$1.3 billion in
revenues in its fiscal year ended February 25, 2006 and approximately 5,300 employees on six continents.
GTECH leverages its global lottery experience and capabilities to offer a full range of game content and
solutions and financial transaction processing services. GTECH is the world’s leading operator of highlysecure on-line lottery transaction processing systems, doing business in 51 countries worldwide, and
GTECH has a growing presence in commercial gaming technology and financial services transaction
processing. GTECH’s core market is the lottery industry, for which it designs, sells and operates a
complete suite of lottery-enabled point-of-sale terminals that are electronically linked with a centralised
transaction processing system which mediates lottery funds between the retailer, where a transaction is
enabled, and the lottery authority. GTECH currently operates, provides equipment and services to, or has
entered into contracts to operate or provide equipment and services in the future to, 26 of the 43 on-line
lottery authorities in the United States, and 60 of the 122 non-U.S. on-line lottery authorities. In its fiscal
year ending February 25, 2006, which is referred to as its fiscal 2006, GTECH had revenues of
U.S.$1.3 billion, operating income of U.S.$340.7 million and net cash provided by operating activities of
U.S.$429.6 million.
GTECH provides integrated on-line lottery transaction processing solutions, services and products to
governmental lottery authorities and governmental licensees worldwide. GTECH offers its customers a full
range of lottery technology services, including the design, assembly, installation, operation, maintenance
and marketing of on-line lottery systems and instant-ticket support systems. GTECH’s lottery systems
consist of numerous lottery terminals located in retail outlets, central computer systems, systems software
and game software, and communications equipment which connects the terminals and the central
computer systems. In its fiscal 2006, approximately 84% of GTECH’s revenues were related to its on-line
lottery services and products. In its fiscal 2004, GTECH further enhanced its product offering and
leadership position when it acquired Interlott Technologies, Inc., a leading provider of instant ticket
vending machines for the worldwide lottery industry.
In recent years, GTECH has taken steps to broaden its offerings of services outside of its core market
of providing on-line lottery services into the gaming technology and commercial services markets. During
its fiscal 2005, GTECH entered into an agreement with the owners of the privately-held Gauselmann
Group (‘‘Gauselmann’’) to acquire a 50% controlling equity interest in the Atronic group of companies
(‘‘Atronic’’) owned by Gauselmann. Atronic, the leading video gaming machine provider in Europe, Russia
and Latin America, has a growing presence in the United States and is licensed in 209 worldwide gaming
jurisdictions. Subject to obtaining required regulatory and gaming license approvals and to the satisfaction
of other closing conditions, the agreement, as amended, provides for this acquisition to close not later than
December 2007. In addition, during its fiscal 2005, GTECH’s majority-owned commercial services
subsidiary, PolCard S.A. (‘‘PolCard’’), completed the acquisition of BillBird S.A., the leading provider of
electronic bill payment services in Poland. In appropriate circumstances, GTECH has extended its on-line
and video lottery product offerings through acquisitions. During its fiscal 2005, GTECH completed the
acquisition of Spielo Manufacturing, Inc. (‘‘Spielo’’), a leading provider of video lottery terminals and
related products and services to the global gaming industry.
Competitive Strengths of the Combined Group
Lottomatica believes that the combination of GTECH and Lottomatica will create one of the world’s
leading gaming solutions providers that will be well positioned to capture growth opportunities in global
3
gaming markets. In addition, Lottomatica also believes that the combination will create a full service global
gaming company with strong international brands, which will benefit from the following key strengths:
Leading Market Position in the Global Lotteries Market. Based on data published in La Fleur’s 2005 World
Lottery Almanac, Lottomatica believes the Combined Group will be one of the world’s largest on-line
lottery services companies and will either operate or provide equipment or services to on-line lotteries
representing approximately 60% of the worldwide on-line lottery market based on total wagers. By
leveraging the economies of scale provided by GTECH’s international reach and drawing on Lottomatica’s
and GTECH’s experience in the lottery, gaming and processing services businesses, Lottomatica believes
the Combined Group will have the ability to offer its services and products more competitively, while
maintaining the ability to generate returns with stable and predictable margins. In addition, Lottomatica
believes that GTECH, as the existing technology provider, benefits from the general unwillingness of its
customers to run the risk of service failures that a change in technology provider upon the expiration of an
existing contract may produce. These factors, Lottomatica believes, will provide the Combined Group with
a competitive advantage over existing competitors and any potential new entrants in the lotteries, gaming
and processing services markets.
Integrated Technology and Operating Expertise. Lottomatica believes its combined businesses will benefit
from a unique set of complementary expertise in technology and operations. By leveraging GTECH’s
strong market recognition as one of the leading providers of technology platforms and systems to the
lottery industry and Lottomatica’s expertise achieved from operating for over twelve years the Italian
Lotto, the world’s largest on-line lottery in 2005 according to La Fleur’s 2005 World Lottery Almanac,
Lottomatica believes the Combined Group will be able to provide a unique offering of services and gaming
products. In addition, Lottomatica believes that GTECH’s most recent lottery technology platform,
GTECH Enterprise Series, has become the industry standard.
Track Record of Maintaining High Margins. Over the past several years, Lottomatica has achieved
significant cost savings and improved the efficiency of its operations. In particular, Lottomatica’s EBITDA
margin increased to 46% in 2005, from 39% in 2001 (EBITDA margin for 2005 is determined based on
IFRS, while EBITDA margin for 2001 is determined based on Italian GAAP, which affects the
comparability of the two metrics. See ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Lottomatica—Transition to IFRS’’ and ‘‘Appendix E—Lottomatica—Summary of
Certain Significant Differences Among Italian GAAP, IFRS and U.S. GAAP’’). Lottomatica believes that
the Acquisition and GTECH’s successful integration into Lottomatica will create further cost efficiencies
and reduce Lottomatica’s combined operating costs by combining selected European facilities of GTECH
and Lottomatica, consolidating global information technology systems, optimising selected global
management functions, leveraging worldwide purchasing power and consolidating selected common
regulatory compliance costs, including the de-listing of the GTECH common stock following the
Acquisition. Lottomatica believes that these actions, combined with each company’s historic focus on
business optimisation, will permit Lottomatica to further improve Lottomatica’s ability to sustain high
margins.
Diversified Portfolio of Products and Services. Lottomatica believes that the combination of the GTECH
and Lottomatica businesses will provide the opportunity to expand the portfolio of products and services
the Combined Group will be able to provide:
• as a designer, developer and operator of lottery systems and equipment Lottomatica believes the
Combined Group will be in a position to provide a more integrated solution to existing and
prospective lottery customers;
• by leveraging GTECH’s experience as a provider of content for Gaming Machines and its recently
acquired capability to design and manufacture Video Lottery Terminals, and Lottomatica’s
operating expertise, Lottomatica expects to be able to expand its market share in the gaming
4
business and take advantage of the vertical integration that Lottomatica expects the Combined
Group to achieve in these businesses;
• Lottomatica believes that GTECH’s technology capability together with Lottomatica’s operating
expertise should allow Lottomatica to take advantage of any expansion in the interactive gaming
and lottery businesses; and
• Lottomatica believes that its combined experience in the payment processing services market and
the international reach of GTECH’s technology networks will allow Lottomatica to study and
develop new payment services and allow Lottomatica to expand in the payments processing
industry.
Historically Stable and Recurring Revenues and Cash-flows. Lottomatica’s and GTECH’s businesses have
historically produced consistent revenues and cash-flows. For example, wagers on the Lotto have been
generally in the range of A7 billion–A8 billion over the period from 2000 through 2005 (except for 2004, for
which wagers were unusually high) and Lottomatica’s Revenues from Lotto were in the range of between
approximately A400 million and A430 million over the same period (other than the unusually high
Revenues in 2004). In addition, lottery contracts tend to be long-term in nature. Historically, a majority of
GTECH’s contracts have been for terms of at least five to seven years in duration.
Strong Management Team. The senior management team for the Combined Group has significant
collective industry experience. Lottomatica believes that the combination of a team which has long
experience in the lottery and gaming service industry, particularly in the management of international
operations, with a team that has more than a decade of experience in the management and operation of
the lottery and gaming business, will provide the Combined Group with a unique combination of skills.
Mr. W. Bruce Turner, GTECH’s current President and Chief Executive Officer, is expected to assume the
role of Lottomatica’s Chief Executive Officer and General Manager and Mr. Jaymin Patel, GTECH’s
current Chief Financial Officer, is expected to assume the role of Lottomatica’s Chief Financial Officer.
Mr. Marco Sala, the current General Manager of Lottomatica, is expected to assume the role of
Lottomatica’s Managing Director and General Manager for the Republic of Italy. Lottomatica’s senior
management team is expected to invest a significant amount of money in Lottomatica’s ordinary shares
which Lottomatica believes will provide high performance incentivisation and accountability. It is currently
expected that Messrs. Turner and Patel and Mr. Walter DeSocio (who is expected to assume the role of
Lottomatica’s Chief Administrative Officer) as well as other GTECH executive officers will each have the
opportunity to purchase newly issued ordinary shares of Lottomatica after completion of the proposed
Acquisition at the price to be established in the Rights Offering and that they will invest a significant
amount of the net after-tax payments received as Merger consideration in this manner. Subject to
negotiation of the definitive terms of such investments, Messrs. Turner, Patel, DeSocio and other GTECH
executive officers currently expect to invest approximately 50% of the net after-tax consideration they each
expect to receive in the proposed Merger on this basis.
Strategy
Through the Acquisition, Lottomatica’s aim is to become one of the world’s largest regulated gaming
and services company, providing innovation in technology, content and integrated services delivering and
maintaining the highest standards. Following the Acquisition, in Lottomatica’s three businesses, namely its
5
Lotteries business, its Gaming Machines business and its Services business, the Combined Group will
pursue the following strategies designed to achieve this stated aim:
Lotteries Business
• Seek to maintain Lottomatica and GTECH’s leading position as an operator and integrator
respectively, of open, standards-based transaction processing serving the global lottery and gaming
industries through:
– operating new games when introduced in the Republic of Italy;
– continuously developing the Combined Group’s technology in order to preserve what
Lottomatica believes is the competitive advantage of superior technical solutions such as
GTECH’s Enterprise Series;
– expanding the Combined Group’s network, in terms of increasing both the number of terminals
and the number of points of sale, with particular focus on new self-service technology initiatives
worldwide;
– extending the Combined Group’s product price range to capture different player segments;
– expanding in new markets by both bidding for concessions up for renewal (for example Greece,
West Virginia, Connecticut, Pennsylvania and Indiana) and exploring greenfield opportunities
(such as the privatisation of the Turkish lottery and in China, Russia, Nicaragua and Vietnam);
and
– leveraging the Combined Group’s marketing skills to improve game visibility and enhance game
appeal and its comprehension.
Gaming Machines Business
• Seek to become a leading provider of technology solutions to the global gaming industry through:
– leveraging Lottomatica’s existing amusement with prize machine network and Lottomatica’s
processing systems to introduce video lottery terminals in the Republic of Italy;
– leveraging GTECH’s Gaming Machine technology to expand across the value chain in the Italian
Gaming Machine business, from the concessionaire to the machine operations segment;
– investing in Lottomatica’s technology platform for central processing and monitoring of Gaming
Machines in network configurations, while accelerating Lottomatica’s focus on the development
of creative game content;
– exploring opportunities for consolidation in the fragmented Italian Gaming Machines market;
– maximising the value of recent strategic alliances (Hasbro Properties Group and Harrah’s
Entertainment, Inc.); and
– expanding into the global commercial gaming market through Atronic.
Services Business
• Seek to become a leading processor of commercial transactions at retail locations through:
– expanding Lottomatica’s commercial services portfolio in current markets by cross-fertilising
Lottomatica’s and GTECH’s expertise;
– leveraging Lottomatica’s existing points of sale network and increasing the number of direct and
indirect points of sale;
6
– capitalising on opportunities to expand in emerging markets through strategic partnerships and
joint ventures;
– introducing new products and services such as money transfer; and
– leveraging Lottomatica’s brands to improve visibility and network recognition.
The Transactions
The Acquisition will be effected by means of the Merger of the Acquisition Subsidiary into GTECH.
GTECH expects to have approximately 132.8 million shares of common stock outstanding on a fully
diluted basis (applying the treasury method), including options and shares issuable upon conversion of
convertible debt at the effective time of the Merger. The total value of the Acquisition is approximately
A4.0 billion, including the assumption of GTECH’s existing indebtedness. Completion of the Acquisition,
which is expected to occur in mid-2006, is subject to approval by GTECH’s shareholders, receipt of
financing, regulatory approvals, receipt of contract assignment assurance from certain significant lottery
customers, Lottomatica maintaining a pro forma investment grade corporate credit rating, and other
customary conditions. See ‘‘The Transactions—The Acquisition’’.
The Acquisition (including the refinancing of GTECH indebtedness as described below) will be
funded through:
• the proceeds of this offering;
• available cash of GTECH and Lottomatica of approximately U.S.$525.0 million (approximately
A434 million);
• the proceeds of a A1.4 billion rights issue by Lottomatica (the ‘‘Rights Offering’’); and
• approximately U.S.$2.260 billion of senior term loans (the ‘‘Term Facilities’’) under the
U.S.$2.760 billion of senior credit facilities (the ‘‘Senior Credit Facilities’’) extended to the
Acquisition Subsidiary; the borrowings under the Senior Credit Facilities will be guaranteed by
Lottomatica, Holdings and certain U.S. operating subsidiaries of GTECH.
De Agostini S.p.A. (‘‘De Agostini’’), the majority shareholder of Lottomatica, has agreed, subject to
certain conditions, to subscribe for its full, direct and indirect, pro rata share of the Rights Offering
(amounting to approximately A0.8 billion). See ‘‘Certain Relationships and Related Party Transactions—
The De Agostini Undertakings’’. Credit Suisse Securities (Europe) Limited and Goldman Sachs
International have (i) as joint lead underwriters agreed, severally and not jointly, subject to certain
conditions, to enter into an underwriting agreement with respect to the Rights Offering (net of shares to be
acquired by De Agostini and any shares which Mediobanca—Banca di Credito Finanziaro S.p.A.
(‘‘Mediobanca’’), as beneficiary of a swap agreement covering 6,198,733 ordinary shares of Lottomatica,
may undertake to subscribe for and, (ii) entered into a subscription agreement with respect to this offering
of Securities pursuant to which they have agreed, severally and not jointly, subject to certain conditions, to
procure subscribers for, and failing which to subscribe for, these Securities. Credit Suisse International,
Credit Suisse, London Branch, Goldman Sachs Credit Partners L.P. and certain other lenders have
committed to provide the financing pursuant to the Senior Credit Facilities. The financings and related
commitments are subject to the Combined Group maintaining an investment grade corporate credit rating,
the absence of a material adverse effect (which is defined in a manner substantially consistent with that
contained in the Merger Agreement) and other customary conditions. See ‘‘The Transactions—The
Financing’’. The Securities will be mandatorily redeemed in cash by the Issuer at 101% of their aggregate
principal amount together with all accrued but unpaid interest on the earlier to occur of the termination of
the Merger Agreement in accordance with its terms and October 10, 2006, if the Acquisition is not
completed (See ‘‘Terms and Conditions of the Securities—Redemption and Purchase—Mandatory
Redemption Event’’). Furthermore, De Agostini and Lottomatica have agreed to enter into lock-up
7
SUMMARY
This summary highlights selected information about Lottomatica and the offering of the Securities
contained in this Offering Circular. This summary does not contain all the information prospective investors
should consider before investing in the Securities. The following summary should be read in conjunction with,
and is qualified in its entirety by, the more detailed information included in this Offering Circular, including the
financial statements of Lottomatica and GTECH and the related notes thereto. Prospective investors should
read carefully the entire Offering Circular to understand Lottomatica’s businesses, the nature and terms of the
Securities and the tax and other considerations which are important to a prospective investor’s decision to invest
in the Securities, including the risks discussed under the caption ‘‘Risk Factors’’. Unless the context otherwise
requires, the terms ‘‘Issuer’’ and ‘‘Lottomatica’’ refer to Lottomatica S.p.A. and its subsidiaries, and the term
‘‘GTECH’’ refers to GTECH Holdings Corporation.
Overview
Lottomatica is one of the largest lottery operators in the world, based on total wagers, and a leader in
the Italian gaming industry. Lottomatica has built an extensive real-time, on-line distribution network, with
approximately 133,000 terminals in approximately 77,000 points of sale throughout the Republic of Italy
(including approximately 17,000 points of sale where Lottomatica provides only processing services for
third parties), comprised of tobacconists, bars, petrol stations, newspaper stands and motorway restaurants.
Lottomatica has leveraged its distribution and transaction processing competence to expand its activities
beyond Lotteries and also provides commercial, payment and other processing services through its
network. Lottomatica currently operates three businesses in two segments: (i) Lotteries and Gaming,
comprising Lotto, Instant and Traditional Lotteries and Sports Pools and Other Pari-Mutuel Betting, and
its Gaming Machines business and (ii) Services, consisting of its commercial, payment and other processing
services businesses. For the year ended December 31, 2005, Lottomatica generated Total Revenues of
A582.7 million, EBITDA of A266.0 million and Operating Profit of A212.3 million. See ‘‘Presentation of
Financial Information’’ and ‘‘—Summary Consolidated Historical and Pro Forma Financial Data’’.
Since 1993, Lottomatica has been the sole concessionaire for the Italian Lotto game, which is the
largest on-line lottery in the world in terms of wagers, according to La Fleur’s 2005 World Lottery
Almanac. Lotto is a traditional game that was played off-line for centuries. Lottomatica commenced
operating Lotto in 1994. Since Lottomatica established the on-line infrastructure for Lotto, wagers have
grown significantly, stabilising in recent years in the region of A7 billion–A8 billion per year, from
A2.8 billion in 1995. Managing Lotto has provided Lottomatica with substantial experience in managing all
the activities along the lottery value chain, such as collecting wagers through its network, paying out prizes,
managing all accounting and other back-office functions, running advertising and promotion, operating
data transmission networks and processing centers, training staff, providing retailers with assistance and
supplying materials for the game. For the year ended December 31, 2005, Lottomatica generated
Revenues from Lotto of A432.3 million or approximately 74.2% of its Total Revenues.
In addition to Lotto, Lottomatica operates the following lotteries and games:
• Instant and Traditional Lotteries: Instant Lotteries are off-line lotteries consisting of scratch-off
tickets with hidden numbers, letters and/or symbols that participants scratch off and immediately
know whether they have won, and Traditional Lotteries are off-line lotteries in which players
purchase tickets with the winning ticket(s) being drawn on a later date.
• Sports Pools and Other Pari-Mutuel Betting: Sports Pools and Other Pari-Mutuel Betting include
pari-mutuel games in which players bet on the outcome of, and number of goals scored in, sporting
events, usually soccer matches (e.g., Totocalcio, ‘‘9’’ and Totogol) and other pari-mutuel games in
which players wager on other sports events, horse racing, motor sports, cultural events and current
affairs.
1
• Gaming Machines: Lottomatica provides information technology services for Gaming Machines.
Gaming Machines are electronic machines involving elements of skill or entertainment and risk,
and having random winnings. In the coming years, Lottomatica intends to seek to expand the
contribution of its Gaming Machines business through growth in video-lottery terminals, for which
all current Gaming Machine concessionaires in the Republic of Italy are permitted to provide
information technology services commencing in 2006.
Lotteries and Gaming segment, equal to approximately 87.9% of its Total Revenues.
Lottomatica also offers the following automated payment and distribution services:
and ticketing for sporting and musical events) and collects payments from end-users.
• Payment Services: Lottomatica collects payments from consumers for both private sector enterprises
(i.e., for the payment of utility bills) and public sector entities (i.e., fines, local taxes and television
license fees).
• Processing Services: Lottomatica provides technology infrastructures to third parties for the
processing of transactions (i.e., car road taxes, third party electronic top-ups for pre-paid mobile
telephones, some minor taxes and loyalty programs and stamp duties printing).
Services segment, equal to approximately 11.1% of its Total Revenues.
In addition, in 2006 Lottomatica expects to launch stored value services, which consist of issuing and
A critical component of Lottomatica’s operations is its distribution network. Lottomatica originally
developed its network to provide on-line terminals for Lotto. Lottomatica’s various networks now
comprise an extensive real-time, on-line network, comprised of tobacconists, bars, petrol stations,
newspaper stands and motorway restaurants. Lottomatica uses its networks to distribute lotteries and other
games, provide information technology services for Gaming Machines and offer commercial, payment and
other processing services. Lottomatica maintains four separate networks for Lotto, Sports Pools and other
Pari-Mutuel Betting, Gaming Machines, and Services. The Lotto, Sports Pools and other Pari-Mutuel
Betting and Services networks and terminals also support Instant and Traditional Lotteries.
Lottomatica’s Proposed Acquisition of GTECH
On January 10, 2006, Lottomatica, Gold Holding Co., a newly formed subsidiary of Lottomatica
(known as ‘‘Holdings’’), Gold Acquisition Corp., another newly formed indirect subsidiary of Lottomatica
(known as the ‘‘Acquisition Subsidiary’’) and GTECH entered into an agreement and plan of merger (the
‘‘Merger Agreement’’) pursuant to which Holdings will acquire GTECH by way of a merger between the
Acquisition Subsidiary and GTECH (the ‘‘Merger’’), for U.S.$35.00 in cash per outstanding share of
existing indebtedness. GTECH is a leading provider of gaming technology and services worldwide. Based
on data published in La Fleur’s 2005 World Lottery Almanac, Lottomatica believes the combined group
resulting from the Acquisition (the ‘‘Combined Group’’) will be one of the world’s largest lottery services
companies and will either operate or provide equipment or services to on-line lotteries representing
approximately 60% of the worldwide on-line lottery market based on total wagers. The Combined Group
will have operations in over 50 countries worldwide and approximately 6,300 employees. On a pro forma
basis after giving effect to the Acquisition, 2005 revenues for the Combined Group would have been
approximately A1.6 billion and adjusted EBITDA for the Combined Group would have been A682 million.
2
Completion of the Acquisition is subject to receipt of financing, approval by GTECH shareholders,
regulatory approvals, receipt of contract assignment assurance from certain significant lottery customers,
Lottomatica maintaining a pro forma investment grade corporate credit rating, and other customary
conditions.
GTECH
revenues in its fiscal year ended February 25, 2006 and approximately 5,300 employees on six continents.
GTECH leverages its global lottery experience and capabilities to offer a full range of game content and
solutions and financial transaction processing services. GTECH is the world’s leading operator of highlysecure on-line lottery transaction processing systems, doing business in 51 countries worldwide, and
GTECH has a growing presence in commercial gaming technology and financial services transaction
processing. GTECH’s core market is the lottery industry, for which it designs, sells and operates a
complete suite of lottery-enabled point-of-sale terminals that are electronically linked with a centralised
transaction processing system which mediates lottery funds between the retailer, where a transaction is
enabled, and the lottery authority. GTECH currently operates, provides equipment and services to, or has
entered into contracts to operate or provide equipment and services in the future to, 26 of the 43 on-line
lottery authorities in the United States, and 60 of the 122 non-U.S. on-line lottery authorities. In its fiscal
year ending February 25, 2006, which is referred to as its fiscal 2006, GTECH had revenues of
U.S.$1.3 billion, operating income of U.S.$340.7 million and net cash provided by operating activities of
U.S.$429.6 million.
GTECH provides integrated on-line lottery transaction processing solutions, services and products to
governmental lottery authorities and governmental licensees worldwide. GTECH offers its customers a full
range of lottery technology services, including the design, assembly, installation, operation, maintenance
and marketing of on-line lottery systems and instant-ticket support systems. GTECH’s lottery systems
consist of numerous lottery terminals located in retail outlets, central computer systems, systems software
and game software, and communications equipment which connects the terminals and the central
computer systems. In its fiscal 2006, approximately 84% of GTECH’s revenues were related to its on-line
lottery services and products. In its fiscal 2004, GTECH further enhanced its product offering and
leadership position when it acquired Interlott Technologies, Inc., a leading provider of instant ticket
vending machines for the worldwide lottery industry.
In recent years, GTECH has taken steps to broaden its offerings of services outside of its core market
of providing on-line lottery services into the gaming technology and commercial services markets. During
its fiscal 2005, GTECH entered into an agreement with the owners of the privately-held Gauselmann
Group (‘‘Gauselmann’’) to acquire a 50% controlling equity interest in the Atronic group of companies
(‘‘Atronic’’) owned by Gauselmann. Atronic, the leading video gaming machine provider in Europe, Russia
and Latin America, has a growing presence in the United States and is licensed in 209 worldwide gaming
jurisdictions. Subject to obtaining required regulatory and gaming license approvals and to the satisfaction
of other closing conditions, the agreement, as amended, provides for this acquisition to close not later than
December 2007. In addition, during its fiscal 2005, GTECH’s majority-owned commercial services
subsidiary, PolCard S.A. (‘‘PolCard’’), completed the acquisition of BillBird S.A., the leading provider of
electronic bill payment services in Poland. In appropriate circumstances, GTECH has extended its on-line
and video lottery product offerings through acquisitions. During its fiscal 2005, GTECH completed the
acquisition of Spielo Manufacturing, Inc. (‘‘Spielo’’), a leading provider of video lottery terminals and
related products and services to the global gaming industry.
Competitive Strengths of the Combined Group
Lottomatica believes that the combination of GTECH and Lottomatica will create one of the world’s
leading gaming solutions providers that will be well positioned to capture growth opportunities in global
3
gaming markets. In addition, Lottomatica also believes that the combination will create a full service global
gaming company with strong international brands, which will benefit from the following key strengths:
Leading Market Position in the Global Lotteries Market. Based on data published in La Fleur’s 2005 World
Lottery Almanac, Lottomatica believes the Combined Group will be one of the world’s largest on-line
lottery services companies and will either operate or provide equipment or services to on-line lotteries
representing approximately 60% of the worldwide on-line lottery market based on total wagers. By
leveraging the economies of scale provided by GTECH’s international reach and drawing on Lottomatica’s
and GTECH’s experience in the lottery, gaming and processing services businesses, Lottomatica believes
the Combined Group will have the ability to offer its services and products more competitively, while
maintaining the ability to generate returns with stable and predictable margins. In addition, Lottomatica
believes that GTECH, as the existing technology provider, benefits from the general unwillingness of its
customers to run the risk of service failures that a change in technology provider upon the expiration of an
existing contract may produce. These factors, Lottomatica believes, will provide the Combined Group with
a competitive advantage over existing competitors and any potential new entrants in the lotteries, gaming
and processing services markets.
Integrated Technology and Operating Expertise. Lottomatica believes its combined businesses will benefit
from a unique set of complementary expertise in technology and operations. By leveraging GTECH’s
strong market recognition as one of the leading providers of technology platforms and systems to the
lottery industry and Lottomatica’s expertise achieved from operating for over twelve years the Italian
Lotto, the world’s largest on-line lottery in 2005 according to La Fleur’s 2005 World Lottery Almanac,
Lottomatica believes the Combined Group will be able to provide a unique offering of services and gaming
products. In addition, Lottomatica believes that GTECH’s most recent lottery technology platform,
GTECH Enterprise Series, has become the industry standard.
Track Record of Maintaining High Margins. Over the past several years, Lottomatica has achieved
significant cost savings and improved the efficiency of its operations. In particular, Lottomatica’s EBITDA
margin increased to 46% in 2005, from 39% in 2001 (EBITDA margin for 2005 is determined based on
IFRS, while EBITDA margin for 2001 is determined based on Italian GAAP, which affects the
comparability of the two metrics. See ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Lottomatica—Transition to IFRS’’ and ‘‘Appendix E—Lottomatica—Summary of
Certain Significant Differences Among Italian GAAP, IFRS and U.S. GAAP’’). Lottomatica believes that
the Acquisition and GTECH’s successful integration into Lottomatica will create further cost efficiencies
and reduce Lottomatica’s combined operating costs by combining selected European facilities of GTECH
and Lottomatica, consolidating global information technology systems, optimising selected global
management functions, leveraging worldwide purchasing power and consolidating selected common
regulatory compliance costs, including the de-listing of the GTECH common stock following the
Acquisition. Lottomatica believes that these actions, combined with each company’s historic focus on
business optimisation, will permit Lottomatica to further improve Lottomatica’s ability to sustain high
margins.
Diversified Portfolio of Products and Services. Lottomatica believes that the combination of the GTECH
and Lottomatica businesses will provide the opportunity to expand the portfolio of products and services
the Combined Group will be able to provide:
• as a designer, developer and operator of lottery systems and equipment Lottomatica believes the
Combined Group will be in a position to provide a more integrated solution to existing and
prospective lottery customers;
• by leveraging GTECH’s experience as a provider of content for Gaming Machines and its recently
acquired capability to design and manufacture Video Lottery Terminals, and Lottomatica’s
operating expertise, Lottomatica expects to be able to expand its market share in the gaming
4
(j) Liquid investments are defined as marketable securities available for sale, characterised by high liquidity and highly stable value.
(k) Adjusted net debt is defined as net debt minus liquid investments.
(l) Total capitalisation is defined as Lottomatica’s consolidated shareholders’ equity plus long-term loans, including current portion.
(m) Italian GAAP revenues are adjusted for costs related to the provision of electronic top-up services for pre-paid mobile and fixed
line telephones (related to the LIS and Totobit businesses) and, only for 2003, for prizes and government commissions related to
Global Bingo Corporation (the Spanish bingo business) (‘‘GBC’’). Under IFRS revenues are recognized net of such costs.
(n) EBITDA is defined as results before amortisation, depreciation and write-downs, net financial charges and taxes. EBITDA is
applied by Lottomatica to check and analyse Lottomatica’s operative trends and it is not an accounting measurement under
Italian GAAP nor IFRS. For these reasons EBITDA should not be considered an alternative measurement of Lottomatica’s
operating income and cash-flow. As EBITDA is not defined in the above mentioned accounting principles, such index as applied
by Lottomatica may be different in other companies and may not be comparable. In the Italian GAAP EBITDA calculation
‘‘Other provisions’’ are not taken into account.
The table below reconciles EBITDA to Group net income:
Three Months Ended
March 31,
IFRS
IFRS
2006
2005
Year Ended December 31,
IFRS
IFRS
ITA
ITA
2005
2004
2004
2003
(in thousands of euro)
Reconciliation from EBITDA to Group net income:
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other provisions . . . . . . . . . . . . . . . . . . . . . . .
Amortisation, depreciation and write-downs . . . . .
111,888
—
(18,079)
116,702
—
(10,407)
265,986
—
(53,643)
231,880
—
(62,622)
272,178
(8,207)
(120,724)
199,616
(1,105)
(126,636)
Operating income (EBIT) . . . . . . . . . . . . . . .
Financial income (expense) . . . . . . . . . . . . . . . .
Equity investments income (expense) . . . . . . . . . .
93,809
(17,800)
—
106,295
(2,887)
—
212,343
(16,064)
(34)
169,258
(16,957)
812
143,247
(13,445)
—
71,875
23,513
—
Profit (loss) before extraordinary items . . . . . . .
Extraordinary items . . . . . . . . . . . . . . . . . . . . .
76,009
—
103,408
—
196,245
—
153,113
—
129,802
(19,304)
95,388
(93,095)
Profit (loss) before income taxes . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Results from discontinued operations . . . . . . . . .
76,009
(34,582)
—
103,408
(41,749)
—
196,245
(82,013)
—
153,113
(68,236)
731
110,498
(49,300)
—
2,293
7,388
—
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . .
41,426
(2,977)
61,659
(443)
114,232
(1,841)
85,608
426
61,198
(479)
9,681
(531)
38,449
61,216
112,391
86,034
60,719
9,150
Group net income . . . . . . . . . . . . . . . . . . . .
(o) EBITDA margin represents EBITDA for the year divided by revenues for the year.
(p) Interest expense includes the interest matured on the 4.80% fixed rate notes due 2008 as well as bank and postal interest
expenses.
(q) Total debt/EBITDA ratio represents total debt at the end of the year divided by EBITDA for the year.
(r) EBITDA/interest expense ratio represents EBITDA for the year divided by interest expense for the year.
(*) Not meaningful.
(**) Not provided.
22
Lotteries business, its Gaming Machines business and its Services business, the Combined Group will
pursue the following strategies designed to achieve this stated aim:
Lotteries Business
• Seek to maintain Lottomatica and GTECH’s leading position as an operator and integrator
respectively, of open, standards-based transaction processing serving the global lottery and gaming
industries through:
– operating new games when introduced in the Republic of Italy;
– continuously developing the Combined Group’s technology in order to preserve what
Lottomatica believes is the competitive advantage of superior technical solutions such as
GTECH’s Enterprise Series;
– expanding the Combined Group’s network, in terms of increasing both the number of terminals
and the number of points of sale, with particular focus on new self-service technology initiatives
worldwide;
– extending the Combined Group’s product price range to capture different player segments;
– expanding in new markets by both bidding for concessions up for renewal (for example Greece,
West Virginia, Connecticut, Pennsylvania and Indiana) and exploring greenfield opportunities
(such as the privatisation of the Turkish lottery and in China, Russia, Nicaragua and Vietnam);
and
– leveraging the Combined Group’s marketing skills to improve game visibility and enhance game
appeal and its comprehension.
Gaming Machines Business
• Seek to become a leading provider of technology solutions to the global gaming industry through:
– leveraging Lottomatica’s existing amusement with prize machine network and Lottomatica’s
processing systems to introduce video lottery terminals in the Republic of Italy;
– leveraging GTECH’s Gaming Machine technology to expand across the value chain in the Italian
Gaming Machine business, from the concessionaire to the machine operations segment;
– investing in Lottomatica’s technology platform for central processing and monitoring of Gaming
Machines in network configurations, while accelerating Lottomatica’s focus on the development
of creative game content;
– exploring opportunities for consolidation in the fragmented Italian Gaming Machines market;
– maximising the value of recent strategic alliances (Hasbro Properties Group and Harrah’s
Entertainment, Inc.); and
– expanding into the global commercial gaming market through Atronic.
Services Business
• Seek to become a leading processor of commercial transactions at retail locations through:
– expanding Lottomatica’s commercial services portfolio in current markets by cross-fertilising
Lottomatica’s and GTECH’s expertise;
– leveraging Lottomatica’s existing points of sale network and increasing the number of direct and
indirect points of sale;
6
– capitalising on opportunities to expand in emerging markets through strategic partnerships and
joint ventures;
– introducing new products and services such as money transfer; and
– leveraging Lottomatica’s brands to improve visibility and network recognition.
The Transactions
The Acquisition will be effected by means of the Merger of the Acquisition Subsidiary into GTECH.
GTECH expects to have approximately 132.8 million shares of common stock outstanding on a fully
diluted basis (applying the treasury method), including options and shares issuable upon conversion of
convertible debt at the effective time of the Merger. The total value of the Acquisition is approximately
A4.0 billion, including the assumption of GTECH’s existing indebtedness. Completion of the Acquisition,
which is expected to occur in mid-2006, is subject to approval by GTECH’s shareholders, receipt of
financing, regulatory approvals, receipt of contract assignment assurance from certain significant lottery
customers, Lottomatica maintaining a pro forma investment grade corporate credit rating, and other
customary conditions. See ‘‘The Transactions—The Acquisition’’.
The Acquisition (including the refinancing of GTECH indebtedness as described below) will be
funded through:
A434 million);
• the proceeds of a A1.4 billion rights issue by Lottomatica (the ‘‘Rights Offering’’); and
• approximately U.S.$2.260 billion of senior term loans (the ‘‘Term Facilities’’) under the
U.S.$2.760 billion of senior credit facilities (the ‘‘Senior Credit Facilities’’) extended to the
Acquisition Subsidiary; the borrowings under the Senior Credit Facilities will be guaranteed by
Lottomatica, Holdings and certain U.S. operating subsidiaries of GTECH.
De Agostini S.p.A. (‘‘De Agostini’’), the majority shareholder of Lottomatica, has agreed, subject to
certain conditions, to subscribe for its full, direct and indirect, pro rata share of the Rights Offering
(amounting to approximately A0.8 billion). See ‘‘Certain Relationships and Related Party Transactions—
The De Agostini Undertakings’’. Credit Suisse Securities (Europe) Limited and Goldman Sachs
International have (i) as joint lead underwriters agreed, severally and not jointly, subject to certain
conditions, to enter into an underwriting agreement with respect to the Rights Offering (net of shares to be
acquired by De Agostini and any shares which Mediobanca—Banca di Credito Finanziaro S.p.A.
(‘‘Mediobanca’’), as beneficiary of a swap agreement covering 6,198,733 ordinary shares of Lottomatica,
may undertake to subscribe for and, (ii) entered into a subscription agreement with respect to this offering
of Securities pursuant to which they have agreed, severally and not jointly, subject to certain conditions, to
procure subscribers for, and failing which to subscribe for, these Securities. Credit Suisse International,
Credit Suisse, London Branch, Goldman Sachs Credit Partners L.P. and certain other lenders have
committed to provide the financing pursuant to the Senior Credit Facilities. The financings and related
commitments are subject to the Combined Group maintaining an investment grade corporate credit rating,
the absence of a material adverse effect (which is defined in a manner substantially consistent with that
contained in the Merger Agreement) and other customary conditions. See ‘‘The Transactions—The
Financing’’. The Securities will be mandatorily redeemed in cash by the Issuer at 101% of their aggregate
principal amount together with all accrued but unpaid interest on the earlier to occur of the termination of
the Merger Agreement in accordance with its terms and October 10, 2006, if the Acquisition is not
completed (See ‘‘Terms and Conditions of the Securities—Redemption and Purchase—Mandatory
Redemption Event’’). Furthermore, De Agostini and Lottomatica have agreed to enter into lock-up
7
undertakings consistent with those provided for in similar market transactions. See ‘‘Plan of Distribution’’.
It is expected that the Combined Group will maintain an investment-grade corporate credit rating and that
the new capital structure will have the flexibility to pay a dividend to shareholders and make investments in
growth opportunities.
As of February 25, 2006, GTECH had three series of senior notes outstanding:
• approximately U.S.$148.8 million in aggregate principal amount of 5.25% senior notes due
December 2014;
October 2010; and
December 2009.
The terms of the Senior Credit Facilities require that GTECH exercise (or cause the exercise of) the call
options under the terms of these senior notes within five business days after completion of the Acquisition
described above.
Generally, GTECH may redeem these senior notes at a redemption price equal to the greater of
(i) 100% of the principal amount of the senior notes being redeemed and (ii) the sum of the present values
of the principal amount of the senior notes being redeemed and the remaining scheduled payments of
interest on the senior notes, discounted from their respective scheduled payment dates to the scheduled
redemption date on a semi-annual basis at the treasury rate (as defined in the respective indentures) plus
20 basis points, in the case of the 5.25% notes, 20 basis points, in the case of the 4.75% notes, and 15 basis
points, in the case of the 4.50% notes, plus, in each case, accrued interest to the scheduled redemption
date. Lottomatica anticipates costs of approximately U.S.$10.0 million in connection with the refinancing
of such indebtedness.
As of April 25, 2006, there were approximately U.S.$6.0 million in aggregate principal amount of
GTECH’s 1.75% convertible debentures due 2021 (the ‘‘Convertible Debentures’’) outstanding. Such
Convertible Debentures are convertible into shares of GTECH common stock and, if still outstanding
following completion of the Acquisition, will be convertible into cash. In addition, GTECH has a
U.S.$500 million credit facility which is undrawn as of March 31, 2006, excluding U.S.$2.5 million of letters
of credit. This existing credit facility will be terminated upon, or prior to, completion of the Acquisition.
8
Corporate Structure
The following diagram presents the corporate structure of Lottomatica as of the date hereof and the
Combined Group’s corporate structure after giving effect to this offering of Securities, the Acquisition, the
Rights Offering, borrowings under the Term Facilities and the anticipated application of the net proceeds
therefrom as described in ‘‘Use of Proceeds’’. For a summary of the debt obligations identified in this
diagram, please refer to the sections entitled ‘‘The Transactions’’ and ‘‘Description of Certain
Indebtedness’’. Percentages shown in the diagram below refer to the percentage ownership.
1MAY200606481036
(1)
Lottomatica’s A360.0 million 4.80% Senior Notes due 2008 will be guaranteed by the same guarantors (other than
Lottomatica) that guarantee the Senior Credit Facilities.
(2)
One of GTECH’s subsidiaries, GTECH Rhode Island Corporation, is a guarantor of the Senior Credit Facilities.
28APR200607354871
= Corporate entities arising or acquired in connection with the Acquisition.
9
Summary of the Offering
The following is a summary of certain terms of this offering. It may not contain all the information that is
important to prospective investors. Any defined terms used in this summary of the offering have the meanings
given to them in ‘‘Terms and Conditions of the Securities’’. For additional information regarding the Securities,
see ‘‘Terms and Conditions of the Securities’’.
Description . . . . . . . . . . . . . . . . . . . . .
A750,000,000 Subordinated
Securities due 2066.
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . .
Lottomatica S.p.A.
Issue Price . . . . . . . . . . . . . . . . . . . . . .
100%
Issue Date . . . . . . . . . . . . . . . . . . . . . .
May 17, 2006.
Maturity Date . . . . . . . . . . . . . . . . . . .
Unless previously redeemed or purchased and cancelled, the
Issuer will redeem the Securities on the Floating Rate
Payment Date falling in March, 2066 (the ‘‘Maturity Date’’) at
their aggregate principal amount together with any accrued
and unpaid Scheduled Interest Amount, any unpaid
Optionally Deferred Interest and Equity Funded Deferred
Interest (which Equity Funded Deferred Interest may only be
settled from the proceeds of the issue or contribution of
Issuer Equity as described in ‘‘Equity Funding of Deferred
Interest’’ below) and any unpaid Additional Amounts thereon
(the ‘‘Redemption Price’’).
Call Options . . . . . . . . . . . . . . . . . . . . .
The Issuer may, at its option, redeem all, but not some only,
of the outstanding Securities in cash prior to the Maturity
Date:
Interest-Deferrable
Capital
(a) at the Redemption Price (i) on the Reset Date or on any
Floating Rate Payment Date thereafter, (ii) on any date
prior to the Reset Date upon the occurrence of a
Withholding Tax Event, or
(b) at the Make-whole Price, together with any accrued and
unpaid Scheduled Interest Amount, any unpaid
Optionally Deferred Interest and Equity Funded
Deferred Interest (which Equity Funded Deferred
Interest may only be settled from the proceeds of the
issue and sale or contribution of Issuer Equity as
described in ‘‘Equity Funding of Deferred Interest’’
below) and any Additional Amounts thereon, at any time
prior to the Reset Date, upon a Tax Event or a Change of
Control Event.
Replacement . . . . . . . . . . . . . . . . . . . .
The Issuer’s intention is (other than upon a Mandatory
Redemption Event) only to redeem, repurchase or otherwise
acquire the Securities for cash consideration prior to the
Maturity Date if the Issuer has received from parties that are
not members of the Issuer Group cash proceeds at least
amounting to such consideration within a period of six
months prior to such redemption, repurchase or other
acquisition from the issue, offer and sale or contribution of
10
Lottomatica is the first entrant into an undeveloped market. Lottomatica’s strategy to develop its
businesses and gain market share in some of these markets is untested and may not succeed. Some of
Lottomatica’s competitors are large companies and banks that are more established in these markets or
may have greater financial resources than Lottomatica. Lottomatica also competes with governmental
agencies who may have unique advantages, including in terms of business resources. In some markets,
Lottomatica’s success will depend on continuing business relationships that may be terminated on short
notice. For example, FIT the Italian Tobacconists’ Association, has appointed Lottomatica as the provider
of technology services to tobacconists with respect to payment services for TV license fees, car road taxes
and stamp duties; however, they may choose to use another provider, either alongside or in replacement of
Lottomatica. If Lottomatica’s strategies in the various services markets are not successful or if Lottomatica
underestimates the risk of participating in these markets, then Lottomatica’s results of operations could be
adversely affected.
Restrictions on the acquisition of control of Lottomatica and on the appointment of its chairman, managing
director/general manager, and the chairman of its board of statutory auditors.
The ability of third parties to acquire control of Lottomatica is limited by the following circumstances:
• pursuant to the Decreto Direttoriale (Decree of the Managing Director of the AAMS) of
November 15, 2000, the acquisition of control (however achieved) of Lottomatica by third parties
other than the shareholders of Lottomatica, as of the date of the above Decreto Direttoriale, requires
the authorisation of the Ministry of Economy and Finances (upon 30 days prior notice);
• the Decreto Direttoriale of November 15, 2000 also provides for the prior written approval of the
Ministry of Economy and Finances for the appointment of the Chairman, CEO, General Manager
and Chairman of the Board of Statutory Auditors of Lottomatica; and
• as of April 13, 2006, De Agostini, holds directly approximately 53.365% of the outstanding share
capital of Lottomatica, in addition to approximately 2.892% of the outstanding share capital of
Lottomatica held by Nuova Tirrena S.p.A., an indirect subsidiary of De Agostini (‘‘Nuova Tirrena’’).
See ‘‘Related Party Transactions’’ for additional information.
The interests of Lottomatica’s controlling shareholder may conflict with the interests of Securityholders.
The interests of Lottomatica’s shareholders, including its controlling shareholder, De Agostini, in
certain circumstances, may conflict with the interests of holders of the Securities. As of April 13, 2006,
De Agostini owns, directly or indirectly, approximately 56.257% of the outstanding ordinary shares of
Lottomatica. As a result, De Agostini is able to, and will continue to be able to, exercise significant control
over all matters to be voted on by Lottomatica’s shareholders, including, without limitations, the election
and removal of directors and any capital increases or amendments to Lottomatica’s by-laws.
Risks relating to statements of pre-eminence and to information on the evolution of the basic market.
This Offering Circular contains statements of pre-eminence and estimates on the position of
Lottomatica, GTECH and the Combined Group as formulated by them on the basis of specific knowledge
of the sector, the data available, and their own experience. This Offering Circular also contains
information on the evolution of the basic market in which Lottomatica and GTECH operate. It is
impossible to guarantee that this information can be confirmed. The results of Lottomatica and GTECH
and trends in the aforementioned sectors could be different than the results expected in these statements,
because of the known and unknown risks, uncertainties and other factors including those indicated herein.
35
Lottomatica’s accounts prepared in accordance with IFRS may not be comparable with its previous audited
financial statements prepared in accordance with Italian GAAP.
Pursuant to European Community Regulation EC No. 1606/2002, all companies listed on stock
exchanges in the European Union, including Lottomatica, are required to prepare their consolidated
financial statements in accordance with IFRS, beginning with the accounts for the first financial year ended
after January 1, 2005. Included in this Offering Circular are consolidated financial statements of
Lottomatica for the fiscal year ended December 31, 2005 which were prepared in accordance with IFRS
and fiscal years ended December 31, 2004 and 2003 which were prepared in accordance with Italian GAAP.
The 2004 financial statements prepared in accordance with Italian GAAP have been reconciled to IFRS
for purposes of comparison to the 2005 financial statements. The audited reconciliation of the 2004
financial statements from Italian GAAP to IFRS is included elsewhere in this Offering Circular. In
addition, all of Lottomatica’s IFRS data has been prepared on the basis of the IFRS as in effect as of
December 31, 2005; therefore it is subject to any adjustments that may be necessary, should revised
versions or interpretations of IFRS be issued, including with retroactive effect.
These financial statements have also been prepared in compliance with disclosure requirements
currently in force in the Republic of Italy as established by CONSOB. These disclosure requirements may
not be equivalent to those currently in force in other jurisdictions that apply IFRS, and the application to
Lottomatica of the financial information disclosure requirements of other jurisdictions might result in the
disclosure of financial information or data materially different from that contained in this Offering
Circular.
Lottomatica’s adoption of IFRS for preparation of its audited consolidated results for 2005, means
that these results and the IFRS results for 2004 are not directly comparable with its financial statements
for 2003 prepared in accordance with Italian GAAP. For a discussion of the differences among Italian
GAAP, IFRS and U.S. GAAP see ‘‘Appendix E—Lottomatica—Summary of Certain Significant
Differences Among Italian GAAP, IFRS and U.S. GAAP’’.
Lottomatica’s corporate disclosure practices and accounting standards differ from those of U.S. companies.
A principal objective of the securities laws of the United States, the Republic of Italy and other
countries is to promote full and fair disclosure of all material corporate information. However, there may
be less publicly available information about issuers of securities traded on the MTA than is regularly
published by or about companies listed in the United States, or such information may be available only in
Italian. Also, since Italian GAAP and IFRS differ in certain significant respects from U.S. GAAP, financial
statements prepared in accordance with Italian GAAP or IFRS and reported earnings and losses may
differ in certain respects from those of companies in the United States. For a discussion of the differences
among Italian GAAP, IFRS and U.S. GAAP see ‘‘Appendix E—Lottomatica—Summary of Certain
Significant Differences Among Italian GAAP, IFRS and U.S. GAAP’’. In addition, certain items included
in this Offering Circular, including in particular the unaudited pro forma financial information, does not
include all of the data that would be required under U.S. securities laws in a prospectus for an offering
registered with the U.S. Securities and Exchange Commission.
Lottomatica’s business may be adversely affected by competition from other operators.
Currently Lottomatica operates principally in the lottery sector and also in the gaming sector. The
lottery and gaming business is competitive. Lottomatica faces competition in these sectors from a number
of operators in the Republic of Italy. Although Lottomatica is making investments in infrastructure
intended to position it to exploit the opportunities that the new interactive gaming markets present, it
expects significant competition in these markets from other concessionaires. In the Gaming Machine
business, Lottomatica competes with nine concessionaries that provide information technology services to
Gaming Machines. If Lottomatica expands its Gaming Machines operation business, it will face
36
2007 and ending on (and including) the Reset Date, except
that the first payment of interest to be made on March 31,
2007 shall be in respect of the period from (and including)
May 17, 2006 to (but excluding) March 31, 2007.
From (and including) the Reset Date to (but excluding) the
Maturity Date, interest on the Securities will accrue at a
floating rate and will be payable semi-annually in arrear in
March and September in each year, commencing on the
Floating Rate Payment Date falling in September, 2016, and
ending on (and including) the Maturity Date. From (and
including) the Reset Date, the rate of interest applicable to
each semi-annual Interest Period shall be six-month
EURIBOR plus a margin of 5.05%, but in any case will be no
greater than the maximum rate permitted by then applicable
Italian law. See ‘‘Terms and Conditions of the Securities—
Interest’’.
The amount of interest payable in respect of each Interest
Period (as defined herein) or part thereof, is called a
‘‘Scheduled Interest Amount’’.
If a Change of Control Event occurs and the Issuer does not
elect to redeem the Securities pursuant to their terms, then
the Securities shall bear interest on their aggregate principal
amount at a rate which is the interest rate then prevailing on
the Securities plus an additional margin of 5% per annum,
but in any case no greater than the maximum rate permitted
by then applicable Italian law, in each case with effect from
(and including) the date on which the Change of Control
Event occurred. See ‘‘Terms and Conditions of the
Securities—Redemption and Purchase—Change of Control
Call Event’’.
Reset Date . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016.
Optional Interest Deferral . . . . . . . . . . .
The Issuer may, at its sole discretion, elect to defer payment
of any Scheduled Interest Amount on the Securities. Such
Optionally Deferred Interest shall not itself accrue interest,
may be paid by the Issuer at its discretion in cash at any time
on or before the fifth anniversary of the Interest Payment
Date on which payment thereof was first deferred, but during
such period will become immediately payable in cash on the
date which is the earliest to occur of:
(a) the date on which the Issuer next pays any interest
amount in respect of the Securities or any interest
amount is payable in respect of the Securities (unless
payment thereof is deferred);
(b) the date on which a Capital Payment is next made;
(c) the due date for redemption of the Securities, whether at
their Maturity Date, or any Early Redemption Date, or
the date on which the Securities become immediately
13
due and repayable on the occurrence of an Enforcement
Event;
(d) the date which is 180 days after any petition is filed by
any third party in connection with any Insolvency
Proceedings in respect of the Issuer, where such petition
has not been dismissed by such 180th day; and
(e) the date on which an order is made or a resolution is
passed for the voluntary or involuntary liquidation,
dissolution or winding up of, or an administrative and/or
court order is made for any Insolvency Proceedings in
respect of, the Issuer, or the date on which the Issuer
takes any corporate action for the purposes of opening,
or initiates or consents to, Insolvency Proceedings in
respect of it.
Any Optionally Deferred Interest that has not been paid in
full in cash on or before the fifth anniversary of the Interest
Payment Date on which payment thereof was first deferred
shall, from such fifth anniversary, be referred to as ‘‘Old
Optionally Deferred Interest’’, and may only be settled as
described below under ‘‘Equity Funding of Deferred
Interest’’.
See ‘‘Terms and Conditions of the Securities—Deferrals of
Interest—Optional deferral of interest’’.
Mandatory Interest Deferral . . . . . . . . .
If, 10 business days prior to any Interest Payment Date, the
Coverage Ratio is less than 1.35 (a ‘‘Mandatory Deferral
Event’’), the Issuer shall defer payment of any Scheduled
Interest Amount in respect of the Securities on such Interest
Payment Date unless and to the extent that the Issuer has
available cash proceeds raised from the issue or contribution
of Issuer Equity during the six-month period ending on such
Interest Payment Date and specified at the time of such issue
or contribution to be for the purpose of enabling the payment
of all or part of such Scheduled Interest Amount.
Any Scheduled Interest Amount (or part thereof) not paid by
the Issuer due to the occurrence of a Mandatory Deferral
Event shall be referred to as ‘‘Mandatorily Deferred
Interest’’. Mandatorily Deferred Interest shall not itself
accrue interest.
Mandatorily Deferred Interest shall become payable in the
circumstances and in accordance with the provisions set out
under ‘‘Equity Funding of Deferred Interest’’ below.
See ‘‘Terms and Conditions of the Securities—Deferrals of
Interest—Mandatory deferral of interest’’.
Equity Funding of Deferred Interest . . .
For as long as any Old Optionally Deferred Interest or
Mandatorily Deferred Interest (together, ‘‘Equity Funded
Deferred Interest’’) remains unpaid, the Issuer must, after
obtaining all shareholder authorisations for the issue or
14
and financial performance. These risks may only be heightened in light of the challenges management will
face while integrating the operations of GTECH and Lottomatica. See ‘‘—Risks Relating to the
Acquisition—Lottomatica may be unable to successfully or efficiently integrate its operations and realise
the full cost savings it anticipates to result from the Acquisition’’.
Acquisitions outside of GTECH’s core lottery market may subject it to enhanced competition. For
example, with the completion of its acquisition of Spielo and its announced acquisition of a 50%
controlling equity interest in Atronic, GTECH has entered the broader gaming technology and services
industry, where it expects to encounter significant competition.
Acquisitions also pose the risk that GTECH may be exposed to successor liability relating to actions by
an acquired company and its management before the acquisition. The due diligence GTECH conducts in
connection with an acquisition, and any contractual indemnities it may receive from sellers of acquired
companies, may not be sufficient to protect GTECH from, or compensate it for, actual liabilities. A
material liability associated with an acquisition could also adversely affect GTECH’s results of operations,
business and prospects, and reduce the anticipated benefits of the acquisition.
Expansion of on-line lottery and other forms of gaming face opposition which could limit GTECH’s access to
some markets.
Gaming opponents continue to persist in efforts to curtail the expansion of on-line lottery and other
forms of legalised gaming. GTECH can give no assurance that this opposition will not be successful in
preventing the legalisation of gaming in jurisdictions where these activities are presently prohibited or
prohibiting or limiting the expansion of on-line lottery and other forms of these activities where currently
permitted, in either case to the detriment of its results of operations, business and prospects.
GTECH’s business prospects and future success depend upon its ability to attract and retain qualified
employees.
GTECH’s business prospects and future success depend, in part, upon its ability to attract and to
retain qualified managerial, marketing and technical employees. Competition for such employees is
sometimes intense, and GTECH may not succeed in hiring and retaining the executives and other
employees that it needs. GTECH’s loss of or inability to hire key employees could have a material adverse
effect on its results of operations, business and prospects.
GTECH’s business prospects and future success rely heavily upon the integrity of its employees and executives
and the security of its systems.
The real and perceived integrity and security of a lottery is critical to its ability to attract players.
GTECH strives to set exacting standards of personal integrity for its employees and system security for the
systems that it provides to its customers, and its reputation in this regard is an important factor in its
business dealings with lottery and other governmental agencies. For this reason, an allegation or a finding
of improper conduct on GTECH’s part, or on the part of one or more of its current or former employees
that is attributable to GTECH, or an actual or alleged system security defect or failure attributable to
GTECH, could have a material adverse effect upon GTECH’s results of operations, or prospects, including
its ability to retain existing contracts or obtain new or renewal contracts or to receive or to renew gaming
contracts. See ‘‘—GTECH may be subject to adverse determinations in legal proceedings in Brazil which
could result in substantial monetary judgments, significant reputational damage and the non-extension of
GTECH’s contract with the Caixa Economica Federal, the Brasilian bank and operator of Brasil’s National
Lottery (‘‘CEF’’)’’.
44
GTECH’s dependence on certain suppliers creates a risk of implementation delays if the supply contract is
terminated or breached, and any delays may result in substantial penalties.
GTECH purchases most of the parts, components and subassemblies necessary for its terminals from
outside sources. It assembles these parts, components and subassemblies into finished products in its
manufacturing facility. While most of the parts, components and subassemblies can be purchased through
more than one supplier, GTECH currently has approximately three material sole source vendors. GTECH
believes that if a supply contract with one of these vendors were to be terminated or breached, it would be
able to replace the vendor. However, it may take time to replace the vendor under some circumstances and
any replacement parts, components or subassemblies may be more expensive, which could reduce
GTECH’s margins. Depending on a number of factors, including the level of the related part, component
or subassembly in GTECH’s inventory, the time it takes to replace a vendor may result in a delay in its
implementation of a lottery system for a customer. Generally, if GTECH fails to meet its performance
schedules under its contracts, it may be subject to substantial penalties or liquidated damages, or even
contract termination.
GTECH’s non-lottery ventures, which are an increasingly important aspect of its business, may fail including
by reason of GTECH’s relative lack of experience in markets outside its core lottery market and, in the case of
ventures into the non-lottery gaming market, the difficulty in obtaining necessary licenses.
GTECH’s business prospects and future success depend, in part, upon its ability to expand its
transaction processing services into complementary and parallel markets outside of its core lottery market.
In fiscal 2006, commercial services transaction processing represented approximately 9% of GTECH’s
total revenues and non-lottery gaming represented approximately 7% of its total revenues. By way of
comparison, in fiscal 2003 approximately 5% of GTECH’s total revenues were derived from commercial
services transaction processing, and approximately 2% of its total revenues were derived from non-lottery
gaming. With GTECH’s acquisition in May 2003 of a controlling equity interest in PolCard; the acquisition
in September 2004 of BillBird S.A., the leading provider of electronic bill payment services in Poland; and
GTECH’s December 2004 agreement to acquire a 50% controlling equity position in Atronic, a video slot
manufacturer, GTECH expects non-lottery ventures to become increasingly significant to its overall
financial performance. Because GTECH has less experience in non-lottery markets than it has in its core
lottery market, GTECH’s non-lottery ventures present an enhanced element of risk for it. GTECH’s
non-lottery ventures outside the United States are particularly sensitive to the economic and political risks
of doing business in these countries, including non-United States currency exchange risks. In addition,
GTECH’s ability to complete the acquisition of a 50% controlling equity interest in Atronic, and otherwise
to expand into non-lottery gaming markets, is dependent upon its success in obtaining required non-lottery
gaming licenses in numerous jurisdictions. Obtaining such licenses is in many cases difficult, and there can
be no assurance that GTECH will be granted all non-lottery gaming licenses for which it applies or, if
granted, that such licenses will be granted in a time frame necessary to insure the success of its non-lottery
ventures. As non-lottery services start to represent a more significant portion of GTECH’s operations, the
failure of one or more of its non-lottery ventures could have a material effect on its results of operations,
business and prospects.
If GTECH is unable to protect its intellectual property or prevent its use by third parties, its ability to compete
in the market may be harmed.
GTECH relies upon its ability to develop and protect its proprietary technology and intellectual
property rights to ensure that its competitors do not obtain technology from GTECH that could allow
them to compete more effectively with GTECH. However, intellectual property laws in the United States
and in non-U.S. jurisdictions may afford differing and limited protection, may not permit GTECH to gain
or maintain a competitive advantage, and may not prevent GTECH’s competitors from duplicating its
45
(d) any petition is filed by any third party in connection with
any Insolvency Proceedings in respect of the Issuer, and
such petition is not dismissed within 180 days of such
filing; or
(e) an order is made or a resolution is passed for the
voluntary or involuntary liquidation, dissolution or
winding up of, or an administrative and/or a court order
is made for any Insolvency Proceedings in respect of, the
Issuer, or the date on which the Issuer takes any
corporate action for the purposes of opening, or initiates
or consents to, Insolvency Proceedings in respect of it.
The Securities may only be declared due and repayable upon
the occurrence of an Enforcement Event described in
paragraphs (b), (d) and (e) above. The enforcement rights of
Securityholders in the other circumstances described above
are more limited. See ‘‘Terms and Conditions of the
Securities—Enforcement Events’’.
Taxation . . . . . . . . . . . . . . . . . . . . . . . .
All payments in respect of the Securities shall be made free
and clear of, and without withholding or deduction for, any
taxes, duties, assessments or governmental charges of
whatever nature imposed, levied, collected, withheld or
assessed by or within the Republic of Italy or the United
States of America or any political subdivision thereof or
therein that has power to tax, unless such withholding or
deduction is required by law. In such event, the Issuer shall
pay such additional amounts as will result in the receipt by
Securityholders of the same amounts as would have been
received by them had no such withholding or deduction been
required, subject to certain exceptions and requirements. See
‘‘Terms and Conditions of the Securities—Taxation’’. For a
summary of certain material Italian and U.S. federal income
tax considerations of the purchase, ownership and disposition
of the Securities, see ‘‘Tax Considerations’’. See, also, ‘‘Risk
Factors—U.S. federal income tax classification of Securities,
taxable income recognition’’ regarding the uncertainty with
respect to the proper classification of the Securities for
U.S. federal income tax purposes and the potential
recognition of taxable income for U.S. federal income tax
purposes in advance of the receipt of cash payments from the
Issuer.
Governing Law . . . . . . . . . . . . . . . . . . .
English law (except for the provisions of the Securities and
the Trust Deed relating to subordination which shall be
construed in accordance with Italian law, and subject to
applicable mandatory provisions of Italian law).
Selling Restrictions . . . . . . . . . . . . . . . .
See ‘‘Plan of Distribution’’ and ‘‘Transfer Restrictions’’ for
information on certain restrictions on the offer, sale and
transfer of the Securities in certain jurisdictions.
17
Risk Factors Relating to this Offering and the Securities
The Securities are long-term instruments, and Securityholders have only limited rights to receive repayment of
principal prior to the Maturity Date.
The Securities will be redeemed on the Maturity Date and Lottomatica is under no obligation to
redeem the Securities at any time prior to this date, except pursuant to the mandatory redemption
provisions described herein. The Securityholders have no right to call for the redemption of the Securities
prior to their maturity and may only call for an acceleration of the Securities in very limited circumstances,
on the occurrence of certain Enforcement Events. Securityholders should be aware that they may be
required to bear the financial risks of an investment in the Securities for a long period of time.
Lottomatica may redeem the Securities, at its option, upon certain events and on certain dates.
Lottomatica may, at its option, redeem all but not some only of the Securities:
• at their principal amount together with any accrued and unpaid Scheduled Interest Amounts, any
unpaid Optionally Deferred Interest and Equity Funded Deferred Interest, and any Additional
Amounts thereon (i) on the Reset Date or any Floating Rate Payment Date thereafter for any
reason, or (ii) on any date prior to the Reset Date, upon the occurrence of certain withholding tax
events; and
• at the Make-Whole Price upon the occurrence of certain other tax events or a Change of Control
Event, on any date prior to the Reset Date.
There is no guarantee that Lottomatica may choose to exercise such early redemption options, and
Securityholders should be aware that they may be required to bear the risks of their investment in the
Securities until their maturity. Following any such redemption, Securityholders may not be able to reinvest
their funds in instruments with a comparable yield.
Early redemption may adversely affect the Securityholders’ return on the Securities.
The Securities are subject to mandatory early redemption in the event that (i) the Merger Agreement
is terminated in accordance with its terms or (ii) the Acquisition is not completed by October 10, 2006. The
Securities may, therefore, be redeemed at a time when prevailing interest rates are relatively low. As a
result, Securityholders may not be able to re-invest the redemption proceeds in a comparable security with
an effective rate equal to that of the Securities.
Securityholders may incur a loss if Lottomatica is required to, or elects to, defer interest payments under the
Securities.
Lottomatica may at its discretion elect to defer payment of scheduled interest at any time. In addition,
Lottomatica may be required to exercise its discretion to elect to defer payments of interest pursuant to its
obligations under the Senior Credit Facilities. Any interest so deferred is referred to as ‘‘Optionally
Deferred Interest’’. Optionally Deferred Interest may be paid by Lottomatica at its discretion in cash at
any time, but there is no assurance that Lottomatica will elect to settle such amounts in the future.
Optionally Deferred Interest will not itself accrue interest and will only become payable after a period of
10 years, or earlier upon the occurrence of certain limited events.
Furthermore, if, on the tenth business day prior to any Interest Payment Date, a Mandatory Deferral
Event occurs, Lottomatica must defer payments of scheduled interest on the Securities, except in certain
limited circumstances. A Mandatory Deferral Event is deemed to occur when the Coverage Ratio is less
than 1.35. Any interest so deferred is referred to as ‘‘Mandatorily Deferred Interest’’. Mandatorily
Deferred Interest will not itself accrue interest and will only become payable after a period of 10 years, or
earlier upon the occurrence of certain limited events. See ‘‘Terms and Conditions of the Securities—
49
Additional Information
The Issuer’s name is Lottomatica S.p.A. Lottomatica S.p.A. and its subsidiaries operate a Lotteries
and Gaming business comprising Lotto, Instant and Traditional Lotteries, Sports Pools and other PariMutuel Betting operations, a Gaming Machines business and a Service Business comprising Commercial,
Payment and other Processing Services.
Lottomatica’s registered head office is located at Viale del Campo Boario 56/D, 00153 Rome, Italy,
telephone number +39-06-518991. Lottomatica is registered with the Companies Register of Rome with
registration number 08028081001. Lottomatica was incorporated in the Republic of Italy as a joint stock
company on May 25, 2004 under the name Triplet S.p.A. and changed its name to NewGames S.p.A.
before subsequently changing its name to Lottomatica S.p.A. Lottomatica’s corporate existence is
currently scheduled to expire on December 31, 2070.
19
Summary Consolidated Historical and Pro Forma Financial Data
Lottomatica Historical
The following summary consolidated financial data for Lottomatica and its subsidiaries should be read
in conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Lottomatica’’, the consolidated financial statements of Lottomatica and the other financial
information of Lottomatica included in this Offering Circular. The following table sets forth summary
historical consolidated financial information of Lottomatica prepared in accordance with IFRS as of and
for the three months ended March 31, 2006 as well as for the year ended December 31, 2005, and prepared
in accordance with Italian GAAP as of and for the years ended December 31, 2004 and 2003. In addition,
Lottomatica’s audited consolidated financial statements as of and for the year ended December 31, 2004
prepared in accordance with Italian GAAP have been reconciled to IFRS for purposes of comparison with
2005. The audited reconciliation of the financial statements as of and for the year ended December 31,
2004 from Italian GAAP to IFRS are included in this Offering Circular. The summary consolidated
historical financial data set forth below as of and for the fiscal years ended December 31, 2003, 2004 and
2005 were derived from the audited consolidated financial statements of Lottomatica, included in this
Offering Circular. The selected consolidated historical financial data for the three months ended
March 31, 2006 and 2005 set forth below are derived from the unaudited consolidated financial statements
of Lottomatica, included elsewhere in this Offering Circular.
For a discussion of certain differences among Italian GAAP, IFRS and U.S. GAAP, see
‘‘Appendix E—Lottomatica—Summary of Certain Significant Differences Among Italian GAAP, IFRS and
U.S. GAAP’’.
Three Months Ended
March 31,
IFRS
IFRS
2006
2005
IFRS
IFRS
ITA
2005
2004
2004
ITA
2003
Operating Data:
Total Revenues . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . .
190,306
(11,951)
189,135
(8,209)
582,674
(31,065)
585,774
(29,308)
1,234,246
(365,073)
961,142
(33,456)
Services and personnel costs . . . . . . . . . .
Other provisions . . . . . . . . . . . . . . . . . .
Other operating costs . . . . . . . . . . . . . . .
Amortisation, depreciation and write-downs .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
(62,342)
—
(4,125)
(18,079)
(63,713)
—
(511)
(10,407)
(260,769)
—
(24,854)
(53,643)
(284,924)
—
(39,662)
(62,622)
(573,833)
(8,207)
(23,162)
(120,724)
(710,729)
(1,105)
(17,341)
(126,636)
Operating income (EBIT) . . . . .
Financial income (expense)(a) . . . . .
Equity investments income (expense)
Foreign exchange gains/losses . . . . .
Revaluation . . . . . . . . . . . . . . . .
Extraordinary income (charges) . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
93,809
(17,800)
—
—
—
—
106,295
(2,887)
—
—
—
—
212,343
(16,064)
(34)
—
—
—
169,258
(16,957)
812
—
—
—
143,247
(13,445)
—
166
(243)
(19,227)
71,875
23,513
—
883
(3,402)
(90,576)
Profit (loss) before income taxes . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Results from discontinued operations . . . . . . . . . . .
76,009
(34,582)
—
103,408
(41,749)
—
196,245
(82,013)
—
153,113
(68,236)
731
110,498
(49,300)
—
2,293
7,388
—
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . . .
41,426
(2,977)
61,659
(443)
114,232
(1,841)
85,608
426
61,198
(479)
9,681
(531)
38,449
61,216
112,391
86,034
60,719
9,150
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Group net income . . . . . . . . . . . . . . . . . . . . .
20
Three Months Ended
March 31,
IFRS
2006
Balance Sheet Data (at end
Net fixed assets(b) . . . . . .
Operating working capital(c)
Severance indemnities . . .
of period):
. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
IFRS
IFRS
ITA
2005
2004
2004
ITA
2003
828,040
(180,105)
(7,751)
833,522
(223,970)
(7,619)
577,799
(202,002)
(7,105)
545,183
(196,141)
(6,813)
681,557
(102,404)
(5,666)
Net invested capital(d) . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . . . . .
640,184
579,897
11,871
601,933
504,694
7,561
368,692
312,576
4,770
342,229
286,163
7,631
573,487
400,995
3,818
Long-term loans, incl. current portion(e) . . . . . . . . .
Short-term loans(f) . . . . . . . . . . . . . . . . . . . . . . .
364,394
2,404
360,126
7,260
358,505
3,322
360,599
3,443
361,909
20,288
Total debt(g) . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents(h) . . . . . . . . . . . . . . . .
366,798
(319,834)
367,386
(246,163)
361,827
(241,661)
364,042
(241,595)
382,197
(199,109)
Net debt(i) . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquid investments(j) . . . . . . . . . . . . . . . . . . . . .
46,964
—
121,223
(29,357)
120,166
(64,529)
122,447
(64,129)
183,088
—
Adjusted net debt(k) . . . . . . . . . . . . . . . . . . . .
Total capitalisation(l) . . . . . . . . . . . . . . . . . . . .
46,964
956,162
91,866
872,381
55,637
675,851
58,318
654,393
183,088
766,722
246,163
17,546
(13,871)
69,995
242,184
190,741
(91,298)
(95,464)
197,147
250,495
24,436
(230,417)
199,109
274,225
8,830
(240,569)
120,588
304,199
(146,865)
(78,813)
Cash-flow Data:
Cash and cash equivalents—beginning
—Cash-flow from operating activities .
—Cash-flow from investing activities .
—Cash-flow from financing activities .
of period
. . . . . . .
. . . . . . .
. . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
Cash-flow for the period . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents—ending of period . . . . .
Other Data:
Revenues(m) . . . . . . . . . . . . . .
EBITDA(n) . . . . . . . . . . . . . .
EBITDA margin(o) . . . . . . . . . .
Capital expenditures . . . . . . . .
Interest expense(p) . . . . . . . . . .
Total debt/EBITDA ratio(q) . . . .
EBITDA/interest expense ratio(r) .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
73,671
319,834
Three Months Ended
March 31,
IFRS
IFRS
2006
2005
190,306
111,888
58.8%
14,525
5,124
(*)
21.84x
3,979
44,514
42,486
78,521
246,163
241,661
241,595
199,109
IFRS
IFRS
ITA
2005
2004
2004
189,135
116,702
61.7%
(**)
4,556
(**)
25.62x
582,674
585,774
265,986
231,880
45.6%
39.6%
93,854
40,104
19,209
17,544
1.38x
1.56x
13.85x
13.22x
ITA
2003
587,534
499,400
272,178
199,616
46.3%
40.0%
55,710
147,591
17,544
17,777
1.34x
1.91x
15.51x
11.23x
(a) Financial income (expense) is defined as interest income plus other financial income minus interest expense minus other
financial expense.
(b) Net fixed assets are defined as the sum of property, plant and equipment, intangible fixed assets, financial assets and goodwill.
(c) Operating working capital is defined as the difference between operating current assets and operating current liabilities.
(d) Net invested capital is defined as net fixed assets minus operating working capital minus severance indemnities.
(e) Long-term loans, including current portion consist of the outstanding on Lottomatica’s 4.80% fixed rate notes due 2008,
amounted to A359.6 million (long-term portion) plus A0.5 million (current portion), as of December 31, 2005. ‘‘Long-term’’
means indebtedness having a maturity of over twelve months.
(f) Short-term loans consist of prizes won but not yet paid and the short-term portion of leasing expenses. ‘‘Short-term’’ means
indebtedness having a maturity of twelve months or less.
(g) Total debt is defined as long-term loans including current portion plus short-term loans.
(h) Cash and cash equivalents are defined as cash on hand plus bank and post account.
(i) Net debt is defined as total debt minus cash and cash equivalents.
21
(j) Liquid investments are defined as marketable securities available for sale, characterised by high liquidity and highly stable value.
(k) Adjusted net debt is defined as net debt minus liquid investments.
(l) Total capitalisation is defined as Lottomatica’s consolidated shareholders’ equity plus long-term loans, including current portion.
(m) Italian GAAP revenues are adjusted for costs related to the provision of electronic top-up services for pre-paid mobile and fixed
line telephones (related to the LIS and Totobit businesses) and, only for 2003, for prizes and government commissions related to
Global Bingo Corporation (the Spanish bingo business) (‘‘GBC’’). Under IFRS revenues are recognized net of such costs.
(n) EBITDA is defined as results before amortisation, depreciation and write-downs, net financial charges and taxes. EBITDA is
applied by Lottomatica to check and analyse Lottomatica’s operative trends and it is not an accounting measurement under
Italian GAAP nor IFRS. For these reasons EBITDA should not be considered an alternative measurement of Lottomatica’s
operating income and cash-flow. As EBITDA is not defined in the above mentioned accounting principles, such index as applied
by Lottomatica may be different in other companies and may not be comparable. In the Italian GAAP EBITDA calculation
‘‘Other provisions’’ are not taken into account.
The table below reconciles EBITDA to Group net income:
Three Months Ended
March 31,
IFRS
IFRS
2006
2005
IFRS
IFRS
ITA
ITA
2005
2004
2004
2003
Reconciliation from EBITDA to Group net income:
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other provisions . . . . . . . . . . . . . . . . . . . . . . .
Amortisation, depreciation and write-downs . . . . .
111,888
—
(18,079)
116,702
—
(10,407)
265,986
—
(53,643)
231,880
—
(62,622)
272,178
(8,207)
(120,724)
199,616
(1,105)
(126,636)
Operating income (EBIT) . . . . . . . . . . . . . . .
Financial income (expense) . . . . . . . . . . . . . . . .
Equity investments income (expense) . . . . . . . . . .
93,809
(17,800)
—
106,295
(2,887)
—
212,343
(16,064)
(34)
169,258
(16,957)
812
143,247
(13,445)
—
71,875
23,513
—
Profit (loss) before extraordinary items . . . . . . .
Extraordinary items . . . . . . . . . . . . . . . . . . . . .
76,009
—
103,408
—
196,245
—
153,113
—
129,802
(19,304)
95,388
(93,095)
Profit (loss) before income taxes . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Results from discontinued operations . . . . . . . . .
76,009
(34,582)
—
103,408
(41,749)
—
196,245
(82,013)
—
153,113
(68,236)
731
110,498
(49,300)
—
2,293
7,388
—
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Minority interests . . . . . . . . . . . . . . . . . . . . . .
41,426
(2,977)
61,659
(443)
114,232
(1,841)
85,608
426
61,198
(479)
9,681
(531)
38,449
61,216
112,391
86,034
60,719
9,150
Group net income . . . . . . . . . . . . . . . . . . . .
(o) EBITDA margin represents EBITDA for the year divided by revenues for the year.
(p) Interest expense includes the interest matured on the 4.80% fixed rate notes due 2008 as well as bank and postal interest
expenses.
(q) Total debt/EBITDA ratio represents total debt at the end of the year divided by EBITDA for the year.
(r) EBITDA/interest expense ratio represents EBITDA for the year divided by interest expense for the year.
(*) Not meaningful.
(**) Not provided.
22
GTECH Historical
The following summary consolidated financial data for GTECH and its subsidiaries should be read in
conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations—GTECH’’, the consolidated financial statements of GTECH and the other financial
information of GTECH included or incorporated by reference in this Offering Circular. With the exception
of number of lottery customers at end of period, the data in the table is derived from GTECH’s audited
consolidated financial statements. The selected consolidated income statement data for the fiscal years
ended February 25, 2006, February 26, 2005 and February 28, 2004, and the selected consolidated balance
sheet data as of February 25, 2006 and February 26, 2005, are derived from GTECH’s audited consolidated
financial statements included in this Offering Circular. The selected consolidated balance sheet data as of
February 28, 2004 is derived from GTECH’s audited consolidated financial statements not included in this
Offering Circular.
GTECH’s historical consolidated financial statements and the historical financial information
presented below were prepared on the basis of U.S. GAAP, which differs in certain respects from IFRS.
For a discussion of certain differences between U.S. GAAP as compared to IFRS, relating to the financial
information of GTECH, see ‘‘Appendix F—GTECH—Summary of Significant Differences between U.S.
GAAP and IFRS’’.
Fiscal Year Ended
February 25, 2006
February 26, 2005
February 28, 2004(a)
(in thousands of U.S. dollars, except per share amounts)
Operating Data:
Revenue:
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,122,668
182,138
$1,017,683
239,552
$ 957,471
93,859
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,304,806
1,257,235
1,051,330
Gross Profit:
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
448,140
78,101
401,050
81,578
419,632
34,633
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
526,241
482,628
454,265
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
340,657
211,045
312,816
196,394
287,855
183,200
Per Share Data:(b)
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1.73
1.63
$
$
1.68
1.50
$
$
1.57
1.40
Cash dividends declared per common share . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.34
41,672
$
$
0.34
39,830
$
$
0.255
29,977
Balance Sheet Data (at End of Period):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available-for-sale . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 235,191
260,725
2,099,902
$
94,446
196,825
1,855,141
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . .
Long-term debt, less current portion . . . . . . . . . . . . . . . . .
$
$
334
2,476
726,329
Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 551,407
729,139
569,534
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,005,372
$ 655,768
$ 562,289
$ 429,624
(221,114)
$ 375,209
(429,582)
$ 415,067
(612,459)
Cash-flow Data:
Net cash provided by operating activities . . . . . . . . . . . . . .
Net cash used for investing activities . . . . . . . . . . . . . . . . .
Net purchases (maturities) of available-for-sale investment
securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free cash-flow
(d)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used for) financing activities . . . . . . .
23
—
9,148
542,259
$ 129,339
221,850
1,559,131
$
—
106,319
463,215
63,900
(25,025)
$ 272,410
$ (79,398)
$
$ (70,991)
$
$ 206,206
17,505
221,850
24,458
Fiscal Year Ended
February 25, 2006
February 26, 2005
Other Data:
Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortisation and other . . . . . . . . . . . . . . . .
$ 318,376
30,793
183,014
$ 306,386
19,213
158,615
$ 290,794
10,919
119,059
EBITDA(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 532,183
$ 484,214
$ 420,772
(f)
Ratio of earning to fixed charges
(g)
. . . . . . . . . . . . . . . . . .
EBITDA margin . . . . . . . . . . . . . . . . . .
Debt/EBITDA ratio(h) . . . . . . . . . . . . . . . .
EBITDA/interest expense ratio(i) . . . . . . . . .
Number of lottery customers at end of period(j)
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
11.00x
15.45x
22.30x
40.8x
1.04x
17.28x
95
38.5%
1.51x
25.20x
99
40.0%
1.35x
38.54x
93
(a) 53-week year.
(b) Per share data has been restated to reflect GTECH’s 2-for-1 common stock split that occurred in July 2004.
(c) GTECH adopted EITF 04-8 in December 2004, which requires that all 12.7 million shares underlying its 1.75% Convertible
Debentures be included in diluted earnings per share computations, if dilutive, regardless of whether the conversion
requirements have been met. The adoption of EITF 04-8 resulted in a decrease to diluted earnings per share of U.S.$0.02 in
fiscal 2004.
(d) Free cash-flow (net cash provided by operating activities less net cash used for investing activities, excluding the net purchases or
maturities of available-for-sale investment securities), represents the excess cash-flows generated over and above the investment
of capital required to both maintain and grow GTECH’s ongoing revenue streams. Based upon the long-term contractual cycles
in its business, GTECH believes free cash-flow trends represent a useful guide to help determine the amount of internally
generated capital available for enhancing long-term shareholder value, through a balance of investing in new growth
opportunities, the tax efficient return of capital to its shareholders and repayment of debt obligations. As GTECH defines it, free
cash-flow may not be comparable to other similarly titled measures used by other companies.
(e) GTECH believes that earnings before interest, taxes, depreciation, amortisation and other, or EBITDA, assists in explaining
trends in GTECH’s operating performance, provides useful information about GTECH’s ability to incur and service
indebtedness and is a commonly used measure of performance by securities analysts and investors in the gaming industry.
EBITDA should not be considered as an alternative to operating income as an indicator of GTECH’s performance or to
cash-flows as a measure of GTECH’s liquidity. As GTECH defines it, EBITDA may not be comparable to other similarly titled
measures used by other companies including Lottomatica. Fiscal 2006 EBITDA includes impairment charges of $5.5 million
which are included within depreciation, amortisation and other. There were no such charges in fiscal 2005 or 2004. EBITDA as
shown above reflects GTECH’s historical EBITDA computation which includes interest income of U.S.$10.9 million,
U.S.$4.6 million and U.S.$5.7 million in fiscal 2006, 2005 and 2004, respectively.
The table below reconciles EBITDA to Net Income for the periods presented:
Fiscal Year Ended
February 25, 2006 February 26, 2005 February 28, 2004
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$532,183
$484,214
$420,772
Depreciation, amortisation and other . . . . . . . . . .
(183,014)
(158,615)
(119,059)
Interest expense . . . . . . . . . . . . . . . . . . . . . . .
(30,793)
(19,213)
(10,919)
Income before income taxes . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
318,376
(107,331)
306,386
(109,992)
290,794
(107,594)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . .
$211,045
$196,394
$183,200
EBITDA as shown above reflects GTECH’s historical EBITDA computation which includes:
• interest income of U.S.$10.9 million, U.S.$4.6 million and U.S.$5.7 million in fiscal 2006, 2005 and 2004, respectively;
• equity in earnings of unconsolidated affiliates of U.S.$1.9 million, U.S.$2.8 million and U.S.$6.2 million in fiscal 2006, 2005
and 2004 respectively; and
• other income (expense) of U.S.$(4.3) million, U.S.$5.4 million and U.S.$1.9 million in fiscal 2006, 2005 and 2004 respectively.
24
Fiscal Year Ended
February 25, 2006
February 26, 2005
Cash-flow Data:
Net cash provided by operating activities . . . . . . .
Net cash used for investing activities . . . . . . . . . .
Net purchases (maturities) of available-for-sale
investment securities . . . . . . . . . . . . . . . . . . . .
$ 429,624
(221,114)
$ 375,209
(429,582)
$ 415,067
(612,459)
63,900
(25,025)
Free cash-flow(d) . . . . . . . . . . . . . . . . . . . . . . . . .
$ 272,410
$ (79,398)
$
Net cash provided by (used for) financing
activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (70,991)
$
17,505
$ 206,206
Other Data:
Income before income taxes . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation, amortisation and other . . . . . . . . . .
$ 318,376
30,793
183,014
$ 306,386
19,213
158,615
$ 290,794
10,919
119,059
EBITDA(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 532,183
$ 484,214
$ 420,772
Ratio of earnings to fixed charges
(f)
...........
EBITDA margin(g) . . . . . . . . . . . . . . . . . . . . .
Debt/EBITDA ratio(h) . . . . . . . . . . . . . . . . . . .
EBITDA/interest expense ratio(i) . . . . . . . . . . .
Number of lottery customers at end of period(j)
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.
.
.
.
.
.
.
221,850
24,458
11.00x
15.45x
22.30x
40.8x
1.04x
17.28x
95
38.5%
1.51x
25.20x
99
40.0%
1.35x
38.54x
93
(a) 53-week year.
(b) Per share data has been restated to reflect GTECH’s 2-for-1 common stock split that occurred in July 2004.
(c) GTECH adopted EITF 04-8 in December 2004, which requires that all 12.7 million shares underlying its 1.75% Convertible
Debentures be included in diluted earnings per share computations, if dilutive, regardless of whether the conversion
requirements have been met. The adoption of EITF 04-8 resulted in a decrease to diluted earnings per share of U.S.$0.02 in
fiscal 2004.
(d) Free cash-flow (net cash provided by operating activities less net cash used for investing activities, excluding the net purchases or
maturities of available-for-sale investment securities), represents the excess cash-flows generated over and above the investment
of capital required to both maintain and grow GTECH’s ongoing revenue streams. Based upon the long-term contractual cycles
in its business, GTECH believes free cash-flow trends represent a useful guide to help determine the amount of internally
generated capital available for enhancing long-term shareholder value, through a balance of investing in new growth
opportunities, the tax efficient return of capital to its shareholders and repayment of debt obligations. As GTECH defines it, free
cash-flow may not be comparable to other similarly titled measures used by other companies.
(e) GTECH believes that earnings before interest, taxes, depreciation, amortisation and other, or EBITDA, assists in explaining
trends in GTECH’s operating performance, provides useful information about GTECH’s ability to incur and service
indebtedness and is a commonly used measure of performance by securities analysts and investors in the gaming industry.
EBITDA should not be considered as an alternative to operating income as an indicator of GTECH’s performance or to
cash-flows as a measure of GTECH’s liquidity. As GTECH defines it, EBITDA may not be comparable to other similarly titled
measures used by other companies including Lottamatica. Fiscal 2006 EBITDA includes impairment charges of $5.5 million
which are included within depreciation, amortisation and other. There were no such charges in fiscal 2005 or 2004. EBITDA as
shown above reflects GTECH’s historical EBITDA computation which includes interest income of U.S.$10.9 million,
U.S.$4.6 million and U.S.$5.7 million in fiscal 2006, 2005 and 2004 respectively.
68
Pro Forma
The accompanying pro forma consolidated financial information contains the pro forma consolidated
reclassified financial data of Lottomatica as of and for the year ended December 31, 2005, which give
retroactive effect to the proposed Acquisition and the related financial transactions envisaged to complete
the proposed Acquisition.
The pro forma consolidated reclassified financial data have been obtained on the basis of:
• the historical consolidated financial data of Lottomatica;
• the historical consolidated financial data of GTECH derived from GTECH’s special purpose IFRS
Financial Statements for the period ended December 31, 2005; and
• the pro forma adjustments reflecting the proposed Acquisition and the related financial transactions
envisaged to complete the proposed Acquisition.
In accordance with CONSOB Communication No. DEM/1052803 of July 5, 2001, the effects of the
Acquisition have been shown retroactively in the pro forma consolidated balance sheet as if the Acquisition
had taken place on December 31, 2005 and in the pro forma consolidated income statement as if it had
taken place on January 1, 2005.
The pro forma adjustments made to the consolidated historical financial statements and the scope and
assumptions upon which they are based are described in detail in the explanatory notes to the ‘‘Unaudited
Consolidated Pro Forma Financial Information’’ included in this Offering Circular, in paragraphs 1, 2
and 3.
With respect to the accounting policies adopted by Lottomatica and GTECH in preparing their
respective historical consolidated financial statements, reference is made to the notes to their respective
consolidated financial statements as of and for the year ended December 31, 2005 prepared in accordance
with IFRS, included in this Offering Circular.
In order to interpret the pro forma data correctly, it is necessary to bear in mind the following:
• since the pro forma data are prepared based on assumptions, if the Acquisition had taken place at
the dates referred to for the purpose of preparing the pro forma consolidated financial data, instead
of the date at which it will actually take place, the results presented in the pro forma data would not
be necessarily obtained; and
• the pro forma data do not reflect forecast data since they are prepared to represent only the effects
of the Acquisition that can be identified and measured, without considering the potential impact of
changes in management policies and operational decisions made as a consequence of the
Acquisition.
Further, in view of the difference between the scopes of pro forma and historical financial statements
and the fact that the effects of the Acquisition are calculated differently for the balance sheet and the
income statement, the two pro forma statements need to be read and examined separately, without
attempting to establish any accounting relationship between them.
26
Pro forma
December 31,
2005
(in
thousands of
euro)
Pro forma information:
Total debt(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquid investments(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net debt(c) . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Group net income . . . . . . . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA(d) . . . . . . . . . . . . . . . . . .
Adjusted EBITDA margin . . . . . . . . . . . . . .
Net debt/Adjusted EBITDA ratio . . . . . . . . .
Adjusted EBITDA/net interest expense ratio
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A2,994,037
—
250,367
2,743,670
6,563,815
1,623,183
316,574
67,243
66,673
644,840
681,699
42.0%
4.0x
3.5x
(a) Total debt is defined as long-term debt of A2,964,144 thousand plus short-term debt of A29,893 thousand.
(b) Liquid investments are defined as marketable securities available for sale, characterised by high liquidity and highly stable value.
(c) Net debt is defined as total debt minus cash and cash equivalents minus liquid investments.
(d) A reconciliation for Adjusted EBITDA is set forth below.
Pro forma EBITDA Adjustments:
Revenues . . . . . . . . . . . . . . . . . . . .
Raw materials and other costs . . . . .
Personnel costs . . . . . . . . . . . . . . . .
Capitalisation of internal construction
Lottomatica
....
....
....
costs
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EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Step Up
GTECH
Adjustments
Pro forma
Consolidated
582,674
(244,412)
(72,276)
—
1,040,508
(429,897)
(279,327)
63,507
—
(15,937)
—
—
1,623,182
(690,246)
(351,603)
63,507
265,986
394,791
(15,937)
644,840
Adjustments:
GTECH
Inventory step-up—non cash(1) . . . . . . . . . . . . . . . . . . . . . . . .
Transaction costs(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicle rent expense (in lieu of depreciation)(3) . . . . . . . . . . . .
U.S.$
Euro
Euro
(*)
1,950
4,953
15,937
(*)
(*)
15,937
(*)
(*)
6,903
5,549
5,549
Lottomatica non-recurring(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(*)
(*)
15,373
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(*)
(*)
681,699
(1) A non-cash purchase price allocation pro forma adjustment.
(2) Non-recurring transaction related fees and expenses payable to legal and financial advisors, accountants and other parties as per
accounting records.
(3) Under IFRS, GTECH’s vehicle leases would be treated as capital lease obligations. Consequently, the cost of these vehicles
would be treated as capital expenditures which would be depreciated over the lease term. Furthermore, each lease payment
27
would include an interest expense and a principal reduction component. As the difference between capital and operating lease
treatment does not have a material impact on operating income, no adjustment to the December 31, 2005 financial statements
was considered necessary. However, for purposes of computing pro forma EBITDA, the lease expense associated with these
leased vehicles has been eliminated since, if these leases were in fact capitalised, no rent expense would have been recorded and
the resulting depreciation and interest expense would not have impacted EBITDA.
(4) Lottomatica’s non-recurring costs include the amount recognised to the AAMS linked to the malfunction of the Lotto
connection network that occurred on June 18, 2005 (A7,588,000), the cost connected to the merger of FinEuroGames S.p.A. and
Lottomatica in NewGames S.p.A. (A3,038,000), the cost connected to the arbitration proceedings involving the AAMS with the
purpose of defining the duration of the Lotto concession (A4,605,000), the devaluation of short-term credits to third parties
(A1,500,000), net of some minor extraordinary income (A1,358,000).
(*) Not applicable.
28
RISK FACTORS
Investing in the Securities involves risks. Prospective investors should carefully consider the risks described
below before making an investment decision. The risks and uncertainties described below and elsewhere in this
Offering Circular are not the only ones facing Lottomatica. Additional risks and uncertainties not presently
known to Lottomatica or that Lottomatica currently deems immaterial may also impair its business operations.
In addition to the risks relating to Lottomatica, if the Acquisition is consummated Lottomatica’s and GTECH’s
combined businesses will be subject to risk factors affecting the GTECH business as well as risks relating to the
Acquisition. If any of the following risks actually occur, Lottomatica’s business, financial condition or results of
operations could be materially adversely affected. In that case, the trading price of the Securities could decline
substantially. Capitalised terms used under the caption ‘‘—Risk Factors relating to this Offering and the
Securities’’ but not previously defined have the meanings assigned to them in ‘‘Terms and Conditions of the
Securities’’.
Risk Factors Relating to Lottomatica
Lottomatica’s business is dependent upon the Lotto concession.
A substantial portion of Lottomatica’s revenues is derived from its operation of the Lotto game. As of
December 31, 2005, approximately 74.2% of Lottomatica’s Total Revenues was derived from the Lotto
concession. Lottomatica believes that in the future a large amount of the business and profitability of
Lottomatica will continue to depend upon the Lotto concession. On a pro forma basis after giving effect to
the Acquisition, approximately 26.6% of Lottomatica’s Revenues for the period ended December 31, 2005
would have been derived from the Lotto concession. Therefore, any reduction in Lottomatica’s revenues
from the operation of the Lotto game could have a material adverse impact on Lottomatica’s business.
For further information about the Lotto concession, see ‘‘Regulatory Framework—Lotto—The
Ministerial Decrees of Concession’’.
Revocation or termination of the Lotto concession would have a material adverse impact on Lottomatica’s
revenues.
Lottomatica believes that the Lotto concession will expire on June 8, 2016 as was determined by an
arbitral ruling in favour of Lottomatica on August 1, 2005. The Amministrazione Autonoma dei Monopoli di
Stato, the governmental authority responsible for regulating and supervising gaming in the Republic of
Italy (the ‘‘AAMS’’), filed an appeal against this arbitral ruling on December 15, 2005 before the Court of
Appeal of Rome. The AAMS contends that the Lotto concession will expire on April 17, 2012. As of the
date of this Offering Circular the duration and outcome of the appeal cannot be predicted.
Upon expiration of the Lotto concession, the AAMS may award a new concession through a
competitive bidding process open to parties other than Lottomatica. In addition, the AAMS may revoke
the Lotto concession prior to its expiration upon the occurrence of certain events of default affecting
Lottomatica or if its continuation is determined to be against the public interest, as determined by
principles of law generally applicable to all concessions granted by the Italian Government.
The revocation of the Lotto concession, or the award of the Lotto concession to an entity other than
Lottomatica upon its expiration, would have a material adverse impact on Lottomatica’s revenues,
EBITDA and earnings and on its ability to repay its indebtedness, including the Securities.
For further information about the Lotto concession, see ‘‘Regulatory Framework—Lotto—The
Ministerial Decrees of Concession’’.
29
The limited duration of, or the early revocation or termination of, Lottomatica’s other existing concessions
could have a material adverse impact on Lottomatica’s business.
In addition to Lotto, Lottomatica operates other games and businesses that represent a significant of
Lottomatica’s business pursuant to public authorisations and/or concessions. Such authorisations and
concessions are of limited duration and are subject to revocation upon the occurrence of certain events, or
if the authorisation or concession is determined to be against the public interest. For example:
• the Totocalcio concession expires in July 2007, unless it is extended for an additional year at the
discretion of the AAMS;
• the National Lotteries concession expires in March 2010, with respect to Traditional Lotteries, and
in May 2010, with respect to Instant Lotteries; and
• the Gaming Machines concession expires in October 2010, unless it is extended for an additional
year at the discretion of the AAMS.
Total revenues arising from the Totacalcio concession, the national lotteries concession and gaming
machines concession represent respectively 1.02%, 9.42% and 1.10% of the total revenues of Lottomatica
for fiscal year ended December 31, 2005. The pro forma revenues generated by such concessions in the
same fiscal year are respectively equal to 0.37%, 3.38% and 0.39%. Any revocation and/or lack of renewal
upon expiration of one or more of these authorisations and/or concessions could negatively affect
Lottomatica’s prospects for growth and development and could have a material adverse impact on its
revenues and earnings.
For further information about Lottomatica’s other existing concessions, see ‘‘Business—
Lottomatica—Other Existing Concessions’’.
Lottomatica’s obligation to transfer assets upon the termination of the Lotto and other concessions could have
a material adverse effect on its financial position and results of operations.
Upon the termination of the Lotto concession, Lottomatica will be required at the request of the
AAMS to transfer to the AAMS, free of charge, ownership of assets that are part of the automated system
used to operate the Lotto, such as equipment including terminals at the points of sale, facilities, software,
data files, and any other related assets that may be necessary for the full functioning, operation, and
operability of the system itself.
Approximately 70% of Lottomatica’s goodwill is allocated to its gaming segment. Loss of the Lotto
concession would result in a one-time write-down of depreciation remaining on the Lotto assets and the
goodwill allocated to Lotto.
The obligation to transfer the property pertaining to the operation of Lotto may have detrimental
effects on certain other businesses operated by Lottomatica because Lottomatica uses terminals, central
hardware and software used in the operation of Lotto in connection with certain of its other businesses.
Lottomatica is also subject to similar obligations to transfer assets associated with its other concessions,
except for the Totocalcio concession. Upon termination by the AAMS of any of the other concessions
(other than Totocalcio), Lottomatica will be required at the request of the AAMS to transfer to the
AAMS, free of charge, the entire system or network relating to such terminated concession, with similar
results. For further information, see ‘‘Regulatory Framework’’.
Lottomatica is subject to substantial penalties for failure to perform under its concessions and contracts.
Lottomatica’s concessions and other service contracts often require substantial performance bonds
and require Lottomatica to pay substantial monetary liquidated damages in the event of a default by
Lottomatica. As of December 31, 2005, Lottomatica had outstanding performance bonds in an aggregate
amount of approximately A292,523,000. These bonds and penalties present an ongoing potential for
30
processing system. These new video lottery terminals will enable the introduction of new games remotely
without having to modify the actual Gaming Machine, as is the case with the current generation of AWP
machines.
As of March 31, 2006, RTI Videolot S.p.A. (‘‘RTI Videolot’’), a subsidiary of Lottomatica, held
authorisations for installing 12,000 Gaming Machines, 8,500 of which were already in use for AWP
machines installed in commercial businesses.
In the Gaming Machine business Lottomatica acts as concessionaire providing technological
infrastructure, and is responsible for linking all of the Gaming Machines for which RTI Videolot has
authorisations, ensuring compliance with the regulations regarding game content, win frequency and
payout, administrative services and collecting and remitting accrued taxes to the Ministry of Economy and
Finances. Lottomatica plans to use RTI Videolot’s remaining 3,500 authorisations primarily for video
lottery terminals.
Lottomatica, through its subsidiary Videolot Gestione S.p.A. (‘‘Videolot Gestione’’), also owns a small
number of Gaming Machines, the authorisations for which are included in the 8,500 authorisations already
in use as of March 31, 2006. Lottomatica wished to cease being an owner of Gaming Machines in addition
to being the concessionaire providing technological infrastructure and Videolot Gestione began, during
2005, to dispose of the ownership of these machines, with RTI Videolot continuing to retain the relevant
authorisations. Lottomatica expects to dispose of the remaining machines by the end of 2006 while
continuing to retain the relevant authorisations.
Services
Lottomatica’s Services business generated revenues in 2005 of A63.9 million, an increase of
approximately 32.7% compared to revenues of A38.2 million in 2004.
Lottomatica’s Services business is divided into Commercial Services, Payment Services and Processing
Services. In addition, Lottomatica expects to launch stored value services, which consists of issuing and
Commercial Services
For the year ended December 31, 2005, Lottomatica generated revenues of approximately
A41.1 million from commercial services, an increase of 24.5% compared to revenues of A33.0 million in
2004. The business that has driven this growth and has been the primary factor in the growth of
Lottomatica’s Services business has been the sale of electronic top-up services for pre-paid mobile and
fixed-line telephone accounts.
Electronic Top-up Services. For the year ended December 31, 2005, top-ups were sold through more
than 32,000 Lottomatica and Totobit points of sale, generating revenues of approximately A35.8 million in
2005, an increase of 26.2% compared to revenues of A28.4 million for 2004. Lottomatica expects these
services to continue to grow in the future and be a significant contributor to Lottomatica’s Services
business, primarily because of the continuing trend towards top-up services provided electronically to the
detriment of the scratch card market.
Ticketing Services. Since 1998, Lottomatica, through its subsidiary Lottomatica Italia Servizi S.p.A.
(‘‘LIS’’), has offered an automated ticketing service for the purchase of tickets and seasonal subscriptions
for sports events and cultural and musical events. Approximately 4.1 million tickets were sold through this
service during 2005. Revenues from ticketing services for 2005 were A5.3 million compared with
A4.6 million for 2004, an increase of approximately 14.1%. This increase was primarily due to an expansion
of the distribution channels, for example through Lottomatica’s website, and an increase in the number of
events for which ticketing services are provided.
84
Payment and Collection Services
Lottomatica collects payment from consumers for both private sector enterprises (i.e., the payment of
utility bills) and public sector entities (i.e., fines, local taxes, television license fees and duties). For the year
ended December 31, 2005, Lottomatica’s revenues generated from payment services remained stable at
A1.4 million compared with 2004.
Italian citizens are allowed to pay local fines and various taxes, court fees and television license fees
electronically at certain outlets, such as Lottomatica’s network of tobacconists, in addition to post offices
and banks.
Processing Services
For the year ended December 31, 2005, Lottomatica generated approximately A15.4 million in
revenues from processing services, compared with A10.5 million in 2004, an increase of approximately
47.0%. This increase is primarily due to the commencement of processing stamp duty in 2005 and an
increase in the transactions processed for third parties using Lottomatica’s technology.
Seasonality
While no significant seasonality exists for Lotto, Instant Lotteries or Gaming Machines, seasonality
does affect the following games and services to the extent discussed below:
• Sports Pools: the collection for Totocalcio occurs mostly during the soccer season, which is from
September to June;
• Traditional Lotteries: the distribution and sale of tickets is particularly concentrated in the period
of the Lotteria Italia annual draw, which is from September to January;
• Processing Services: normally, processing for car road tax experiences peaks corresponding with
the four deadlines during the year scheduled by Italian regulations; and
• Ticketing Services: the sale of tickets for sports events coincides with the duration of the national
soccer championship, while the sale of seasonal subscriptions is concentrated only in the summer
months, prior to the beginning of the soccer season.
Regulation and Legal Matters
Lottomatica’s business is highly regulated, and the competition to secure new government contracts is
often intense. Lottomatica is party to a number of proceedings seeking damages or penalties, or alleging
improprieties on the part of Lottomatica. Allegations or findings of improper conduct on Lottomatica’s
part or attributable to it in any manner could have a material adverse effect on its business, including
Lottomatica’s ability to retain existing contracts or to obtain new or renewal contracts. In addition,
continuing adverse publicity resulting from government proceedings and related matters could have a
material adverse effect on Lottomatica’s reputation and business. See the following sections of this
Offering Circular for further information concerning these matters and other contingencies:
• ‘‘Risk Factors—The gaming and betting industry is highly regulated’’;
• ‘‘Business—Lottomatica—Legal Proceedings’’; and
• ‘‘Judicial Proceedings as at December 31, 2005’’ in Lottomatica’s audited consolidated financial
statements for 2005 included elsewhere in this Offering Circular.
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The Combined Group’s interest rate expense could increase in the event of increases in prevailing interest
rates.
A substantial portion of the Combined Group’s indebtedness will bear interest at rates that fluctuate
with prevailing interest rates. As of December 31, 2005, on a pro forma basis after giving effect to this
offering and the borrowings under the Senior Credit Facilities, approximately 63.8% of the Combined
Group’s indebtedness was floating rate indebtedness. Changes in interest rates generally will not impact
the fair market value of such indebtedness, but could have a material adverse effect on the Combined
Group’s cash-flow, its financial condition and results of operations.
Lottomatica may be subject to an unfavourable outcome with respect to pending litigation, which could result
in substantial monetary damages or harm to Lottomatica.
Lottomatica operates in a market with a high level of litigation. At present, Lottomatica is party to
several administrative and civil proceedings, including proceedings brought by competing businesses. A
negative outcome in one or more of these proceedings could require Lottomatica to pay substantial
monetary damages or penalties and/or limit its ability to operate its business. In addition, proceedings
against regulatory authorities challenging tender procedures or the award of any contract, license,
concession, permit or approval to Lottomatica could result in the denial, termination or revocation of such
contract, license, concession, permit or approval, which could have a material adverse effect on
Lottomatica’s operations. In addition, such proceedings may divert senior management’s time and
attention. For a description of certain legal proceedings to which Lottomatica is a party, see ‘‘Business—
Lottomatica—Legal Proceedings’’.
Lottomatica’s systems are subject to network interruption risks which could have a negative impact on the
quality of the services offered by Lottomatica and, as a result, on demand from consumers and consequently
volume of sales.
Lottomatica’s ability to effectively operate Lotto and its other games and services depends to a great
extent on the reliability and security of the information technology systems and networks it uses.
Information technology systems and networks used by Lottomatica are potentially subject to damage and
interruption caused by human error, problems relating to the telecommunications network, natural
disasters, sabotage, viruses, and similar events. Interruptions in the system could have a negative impact on
the quality of the services offered and, as a result, on demand from consumers and consequently on the
volume of sales. In addition, interruptions in the system could result in the revocation of certain of
Lottomatica’s concessions or require it to pay substantial penalties or damages. Cases of interruptions have
occurred in the past, mostly as a result of problems with the telecommunications network. In particular,
one such interruption which occurred on June 18, 2005 involved a large number of terminals connected to
the telecommunications network operated by B.N.L. Multiservizi S.p.A. (‘‘B.N.L. Multiservizi’’) through
British Telecom Albacom S.p.A., which caused the terminals to slow down and/or block intermittently
during the day on which Lotto numbers were drawn. As a result of this interruption, Lottomatica paid
A7.5 million in liquidated damages to the AAMS, while contesting the AAMS’s claim, reserving its right to
appeal and seeking restitution from B.N.L. Multiservizi. Lottomatica believes that it has implemented all
measures necessary to prevent situations similar to those that have arisen in the past, but the possibility
remains that situations with similar effects may recur. Any such service outages could result in the payment
of penalties or damages and have a negative impact on Lottomatica’s financial condition and results of
operations.
Lottomatica’s acquisition strategy may not succeed.
Lottomatica intends to continue to carry out a strategy of internal growth as well as to pursue growth
through the selective acquisitions of companies or businesses in the Republic of Italy and abroad. The
success of Lottomatica’s acquisition strategy is conditioned to a great extent upon the existence of
33
companies or businesses whose characteristics match the objectives that Lottomatica seeks, upon
Lottomatica’s ability to finalise such transactions and to efficiently integrate the companies or businesses
acquired into Lottomatica, and upon obtaining authorisations from the appropriate authorities. The
potential difficulties associated with such acquisitions, such as delays in finalising the procedures or
unexpected liabilities and costs, as well as any inability to obtain operational benefits or synergies from the
transactions carried out, could have a detrimental effect on Lottomatica’s future results. In addition,
Lottomatica may be required by governmental authorities, in order to consummate possible future
acquisitions, to divest part of its existing operations. Further, Lottomatica may voluntarily dispose of newly
acquired businesses or operations.
Because of these factors, Lottomatica’s acquisition strategy involves a high degree of risk and it is not
certain that Lottomatica will succeed in this strategy, nor that any such acquisitions will provide the results
expected. The materialisation of such risks could have a negative impact on Lottomatica’s future results
and growth.
Lottomatica faces risks in connection with its strategy of international expansion.
Lottomatica believes that the international diversification of its operations will become increasingly
important to its results upon the expiration of the Lotto concession. The Acquisition is a key component of
Lottomatica’s development strategy to expand its activities into international markets. As of the date of
this Offering Circular, Lottomatica’s activities are conducted solely in the Republic of Italy, while GTECH
conducts business worldwide.
International expansion, including by acquisitions such as the Acquisition, will require Lottomatica to
confront new highly competitive markets. In addition, Lottomatica will be exposed to a number of risks
related to general economic, social and political conditions in several foreign countries, which could
include, among others, fluctuations in foreign currency exchange rates, foreign exchange restrictions,
unstable capital markets, restrictions on foreign investment, cultural differences, political instability, war,
terrorism, corruption, diverse tax, legal and regulatory regimes and additional expenses and risks inherent
in conducting operations in geographically distant locations.
The gaming and betting industry, in most countries where it has developed, is heavily regulated by
governmental authorities. Although laws and regulations vary by jurisdiction and are subject to
amendment from time to time, Lottomatica will be required, following the Acquisition, to obtain licenses,
concessions, permits or approvals to conduct gaming and betting activities in virtually all jurisdictions in
which GTECH operates and to comply with certain requirements with respect to its financial stability and
integrity. In many jurisdictions, extensive investigations and ongoing reporting involving financial
disclosure by lottery operators and background checks of their employees and significant shareholders are
common. Any failure by one of Lottomatica’s significant shareholders or key managers to submit to such
background checks or provide the required disclosure could prevent Lottomatica from being awarded a
required license, concession, permit or approval, or result in the termination of any of the foregoing.
Because of these factors, the strategy of international expansion involves a high degree of risk and it is
not certain that Lottomatica will succeed in this strategy nor that expansion into international markets will
provide the results expected. The materialisation of such risks could have a negative impact on
Lottomatica’s future results and growth.
Lottomatica’s strategy to expand its services business may fail.
Lottomatica’s business, prospects and future success depend, in part, upon its ability to continue to
run and expand the services part of its business strategy. In addition to running lottery and gaming
concessions, Lottomatica offers various commercial, payment and processing services. These businesses
are subject to risks that are different risks from those affecting the gaming business and, in some cases,
Lottomatica is a new entrant in an existing market with more established competitors while in other cases,
34
Lottomatica is the first entrant into an undeveloped market. Lottomatica’s strategy to develop its
businesses and gain market share in some of these markets is untested and may not succeed. Some of
Lottomatica’s competitors are large companies and banks that are more established in these markets or
may have greater financial resources than Lottomatica. Lottomatica also competes with governmental
agencies who may have unique advantages, including in terms of business resources. In some markets,
Lottomatica’s success will depend on continuing business relationships that may be terminated on short
notice. For example, FIT the Italian Tobacconists’ Association, has appointed Lottomatica as the provider
of technology services to tobacconists with respect to payment services for TV license fees, car road taxes
and stamp duties; however, they may choose to use another provider, either alongside or in replacement of
Lottomatica. If Lottomatica’s strategies in the various services markets are not successful or if Lottomatica
underestimates the risk of participating in these markets, then Lottomatica’s results of operations could be
adversely affected.
Restrictions on the acquisition of control of Lottomatica and on the appointment of its chairman, managing
director/general manager, and the chairman of its board of statutory auditors.
The ability of third parties to acquire control of Lottomatica is limited by the following circumstances:
• pursuant to the Decreto Direttoriale (Decree of the Managing Director of the AAMS) of
November 15, 2000, the acquisition of control (however achieved) of Lottomatica by third parties
other than the shareholders of Lottomatica, as of the date of the above Decreto Direttoriale, requires
the authorisation of the Ministry of Economy and Finances (upon 30 days prior notice);
• the Decreto Direttoriale of November 15, 2000 also provides for the prior written approval of the
Ministry of Economy and Finances for the appointment of the Chairman, CEO, General Manager
and Chairman of the Board of Statutory Auditors of Lottomatica; and
• as of April 13, 2006, De Agostini, holds directly approximately 53.365% of the outstanding share
capital of Lottomatica, in addition to approximately 2.892% of the outstanding share capital of
Lottomatica held by Nuova Tirrena S.p.A., an indirect subsidiary of De Agostini (‘‘Nuova Tirrena’’).
See ‘‘Related Party Transactions’’ for additional information.
The interests of Lottomatica’s controlling shareholder may conflict with the interests of Securityholders.
The interests of Lottomatica’s shareholders, including its controlling shareholder, De Agostini, in
certain circumstances, may conflict with the interests of holders of the Securities. As of April 13, 2006,
De Agostini owns, directly or indirectly, approximately 56.257% of the outstanding ordinary shares of
Lottomatica. As a result, De Agostini is able to, and will continue to be able to, exercise significant control
over all matters to be voted on by Lottomatica’s shareholders, including, without limitations, the election
and removal of directors and any capital increases or amendments to Lottomatica’s by-laws.
Risks relating to statements of pre-eminence and to information on the evolution of the basic market.
This Offering Circular contains statements of pre-eminence and estimates on the position of
Lottomatica, GTECH and the Combined Group as formulated by them on the basis of specific knowledge
of the sector, the data available, and their own experience. This Offering Circular also contains
information on the evolution of the basic market in which Lottomatica and GTECH operate. It is
impossible to guarantee that this information can be confirmed. The results of Lottomatica and GTECH
and trends in the aforementioned sectors could be different than the results expected in these statements,
because of the known and unknown risks, uncertainties and other factors including those indicated herein.
35
Lottomatica’s accounts prepared in accordance with IFRS may not be comparable with its previous audited
financial statements prepared in accordance with Italian GAAP.
Pursuant to European Community Regulation EC No. 1606/2002, all companies listed on stock
exchanges in the European Union, including Lottomatica, are required to prepare their consolidated
financial statements in accordance with IFRS, beginning with the accounts for the first financial year ended
after January 1, 2005. Included in this Offering Circular are consolidated financial statements of
Lottomatica for the fiscal year ended December 31, 2005 which were prepared in accordance with IFRS
and fiscal years ended December 31, 2004 and 2003 which were prepared in accordance with Italian GAAP.
The 2004 financial statements prepared in accordance with Italian GAAP have been reconciled to IFRS
for purposes of comparison to the 2005 financial statements. The audited reconciliation of the 2004
financial statements from Italian GAAP to IFRS is included elsewhere in this Offering Circular. In
addition, all of Lottomatica’s IFRS data has been prepared on the basis of the IFRS as in effect as of
December 31, 2005; therefore it is subject to any adjustments that may be necessary, should revised
versions or interpretations of IFRS be issued, including with retroactive effect.
These financial statements have also been prepared in compliance with disclosure requirements
currently in force in the Republic of Italy as established by CONSOB. These disclosure requirements may
not be equivalent to those currently in force in other jurisdictions that apply IFRS, and the application to
Lottomatica of the financial information disclosure requirements of other jurisdictions might result in the
disclosure of financial information or data materially different from that contained in this Offering
Circular.
Lottomatica’s adoption of IFRS for preparation of its audited consolidated results for 2005, means
that these results and the IFRS results for 2004 are not directly comparable with its financial statements
for 2003 prepared in accordance with Italian GAAP. For a discussion of the differences among Italian
GAAP, IFRS and U.S. GAAP see ‘‘Appendix E—Lottomatica—Summary of Certain Significant
Differences Among Italian GAAP, IFRS and U.S. GAAP’’.
Lottomatica’s corporate disclosure practices and accounting standards differ from those of U.S. companies.
A principal objective of the securities laws of the United States, the Republic of Italy and other
countries is to promote full and fair disclosure of all material corporate information. However, there may
be less publicly available information about issuers of securities traded on the MTA than is regularly
published by or about companies listed in the United States, or such information may be available only in
Italian. Also, since Italian GAAP and IFRS differ in certain significant respects from U.S. GAAP, financial
statements prepared in accordance with Italian GAAP or IFRS and reported earnings and losses may
differ in certain respects from those of companies in the United States. For a discussion of the differences
among Italian GAAP, IFRS and U.S. GAAP see ‘‘Appendix E—Lottomatica—Summary of Certain
Significant Differences Among Italian GAAP, IFRS and U.S. GAAP’’. In addition, certain items included
in this Offering Circular, including in particular the unaudited pro forma financial information, does not
include all of the data that would be required under U.S. securities laws in a prospectus for an offering
registered with the U.S. Securities and Exchange Commission.
Lottomatica’s business may be adversely affected by competition from other operators.
Currently Lottomatica operates principally in the lottery sector and also in the gaming sector. The
lottery and gaming business is competitive. Lottomatica faces competition in these sectors from a number
of operators in the Republic of Italy. Although Lottomatica is making investments in infrastructure
intended to position it to exploit the opportunities that the new interactive gaming markets present, it
expects significant competition in these markets from other concessionaires. In the Gaming Machine
business, Lottomatica competes with nine concessionaries that provide information technology services to
Gaming Machines. If Lottomatica expands its Gaming Machines operation business, it will face
36
competition from numerous operators. Furthermore, Lottomatica faces competition from illegal betting.
See ‘‘—Risks deriving from illegal betting’’ below.
With respect to the commercial, payment and processing services that Lottomatica provides, it faces
competition from Poste Italiane S.p.A. (the Italian post office) and banks, which are more established in
these markets or may have greater financial resources than Lottomatica.
These sources of competition, as well as other sources of competition, could cause Lottomatica to lose
players or customers and could adversely affect Lottomatica’s business, financial condition and results of
operations.
The gaming and betting industry is highly regulated.
The gaming and betting industry in the Republic of Italy is heavily regulated by the AAMS, which
determines (i) games that may be operated and amounts that may be charged by operators, (ii) the prizes
to be awarded, (iii) the compensation paid to concessionaires, including Lottomatica and (iv) the points of
sale. Renewing existing, and applying for new, licenses, concessions, permits and approvals can be costly
and time consuming and there is no assurance of success. Any failure to renew or obtain any such license,
concession, permit or approval could have a material adverse effect on Lottomatica’s business. Any
changes in the legal or regulatory framework or other changes, such as increases in the taxation of gaming
or betting, changes in the compensation paid to concessionaires or increases in the number of licenses,
authorisations or concessions awarded by the AAMS to competitors of Lottomatica could seriously affect
its profitability.
The European Commission has recently sent out letters to seven member states, including to Italy,
requesting information regarding exclusivity in relation to the organisation and offering of betting services
and to the restrictions against those who undertake collection activity or gaming activity without
authorisation from the government. The member states have two months in which to present their
observations, at the end of which, the European Commission may issue its judgment. In the event that the
state under observation does not conform to such judgments within the terms set out by the commission, it
may be referred to the court of justice. The results of this process are not, at this time, foreseeable and it is
not possible to exclude that a partial liberalisation of the gaming market could result, with a consequential
increase in the number of competing operators. This could have a material adverse effect on the
profitability of Lottomatica.
Risks deriving from illegal betting.
A significant threat for the entire gaming and betting industry arises from illegal activities such as
secret betting and, more generally, all forms of betting that circumvent public regulation, including
off-shore gaming, web-based gaming and, potentially, interactive gaming channels. Such illegal activities
may drain significant portions of betting volumes away from the regulated industry. In particular, illegal
betting could take away a portion of the present players that are the focus of Lottomatica’s business,
particularly Lotto. The loss of such players could have an adverse effect on Lottomatica’s results of
operations.
Pro forma data.
This Offering Circular contains the consolidated pro forma data of the Issuer and of GTECH
comprising the income statement, the consolidated balance sheet, and the explanatory notes of pro forma
adjustments included in the pro forma financial information and based on the consolidated balance sheet
of Lottomatica of December 31, 2005 and on the consolidated balance sheet of GTECH of December 31,
2005, both prepared in accordance with the IFRS adopted by the European Union for the purposes of the
preparation of the pro forma consolidated financial information on December 31, 2005 and for the period
from January 1, 2005 to December 31, 2005.
37
The pro forma data were prepared for the purpose of providing an assumption of the net worth, and
financial situation of the Issuer as a result of the Acquisition as if it had occurred for net worth purposes on
December 31, 2005 and for the income statement on January 1, 2005.
The pro forma data are based on the following assumptions:
• in the event that the Acquisition had actually taken place on the dates taken in consideration for the
preparation of the pro forma data, instead of the actual date, the historical data might not
necessarily be equal to the pro forma data; and
• in addition, the pro forma data do not reflect the actual results because they are prepared in such a
way as to represent solely the isolated effects which can be objectively measured concerning the
Acquisition, without taking into account the potential effects due to variation in management
polices and operational decisions resulting from the transaction itself.
Risk Factors Relating to GTECH
Government regulations and other actions affecting the on-line lottery industry could have a negative effect on
GTECH’s business, results of operations or prospects.
In the United States and in many international jurisdictions where GTECH currently operates or
seeks to do business, on-line lotteries are not permitted unless expressly authorised by law. The successful
implementation of GTECH’s growth strategy and its business could be materially adversely affected if
jurisdictions that do not currently authorise lotteries do not approve on-line lotteries or if those
jurisdictions that currently authorise lotteries do not continue to permit such activities.
Once authorised, the ongoing operations of lotteries and lottery operators are typically subject to
extensive and evolving regulation. Lottery authorities generally conduct an intensive investigation of the
winning vendor and its employees prior to and after the award of a lottery contract. Lottery authorities
with which GTECH does business may require the removal of any of its employees deemed to be
unsuitable and are generally empowered to disqualify GTECH from receiving a lottery contract or
operating a lottery system as a result of any such investigation. Some jurisdictions also require extensive
personal and financial disclosure and background checks from persons and entities beneficially owning a
specified percentage (typically 5% or more) of GTECH’s securities. The failure of these beneficial owners
to submit to such background checks and provide required disclosure could jeopardise the award of a
lottery contract to GTECH or provide grounds for termination of an existing lottery contract. Additional
restrictions are often imposed by international jurisdictions upon foreign corporations, such as GTECH,
seeking to do business there.
Further, there have been, are currently and may in the future continue to be investigations of various
types, conducted by governmental authorities into possible improprieties and wrongdoing in connection
with efforts to obtain and/or the awarding of lottery contracts and related matters. In light of the fact that
such investigations frequently are conducted in secret, GTECH may not necessarily know of the existence
of an investigation in which it might be involved. Because GTECH’s reputation for integrity is an
important factor in its business dealings with lottery and other governmental agencies, a governmental
allegation or a finding of improper conduct by or attributable to GTECH in any manner or the prolonged
investigation of these matters by governmental or regulatory authorities could have a material adverse
effect on GTECH’s results of operations, business or prospects, including its ability to retain existing
contracts or to obtain new or renewal contracts. In addition, adverse publicity resulting from any such
proceedings could have a material adverse effect on GTECH’s reputation and business. See ‘‘Business—
GTECH—Legal Proceedings’’.
Finally, sales generated by on-line lottery games are dependent upon decisions over which GTECH
has no control made by lottery authorities with respect to the operation of these games, such as matters
38
relating to the marketing and prize payout features of on-line lottery games. Because GTECH is typically
compensated in whole or in part based on a jurisdiction’s gross on-line lottery sales, lower than anticipated
sales due to these factors could have a material adverse effect on its revenues.
GTECH may be subject to adverse determinations in legal proceedings in Brazil which could result in
substantial monetary judgments, significant reputational damage and the non-extension of GTECH’s contract
with the Caixa Economica Federal, the Brazilian bank and operator of Brazil’s National Lottery (‘‘CEF’’).
GTECH is presently involved in a civil action that was initiated by federal attorneys with Brazil’s
Public Ministry against GTECH Brasil Ltda., GTECH’s Brazilian subsidiary (‘‘GTECH Brazil’’), and two of
its former employees, among others, a criminal action recommended in a preliminary report of a special
investigating panel of the Brazilian congress against one of GTECH’s current and three of its former
employees, among others, a public class action lawsuit in Brazil against, among others, the Brazilian
Federal government, CEF and GTECH Brazil, and related investigations by the Brazilian Federal Police
and the United States Securities and Exchange Commission (‘‘SEC’’) and other legal proceedings and
investigations involving GTECH’s contractual relationship with CEF.
The civil action, initiated in April 2004, alleges that the defendants acted illegally in entering into,
amending and performing, certain contracts between GTECH Brazil and CEF. This lawsuit also seeks to
impose damages equal to the sum of all amounts paid to GTECH under these CEF contracts, and certain
other permitted amounts, minus GTECH’s proven investment costs. The applicable statute also permits
the assessment of interest and, in the discretion of the court, penalties of up to three times the amount of
the damages imposed. GTECH estimates that through the date of the lawsuit it received a total of
approximately 1.5 billion Brazilian reals (or approximately U.S.$702 million at currency exchange rates in
effect as of February 25, 2006) under these contracts. In addition, although it is unclear how investment
costs would be determined for purposes of this lawsuit, and any determination would be subject to court
approval, GTECH estimates that its investment costs through the date of the lawsuit were approximately
between 1.2 billion and 1.4 billion Brazilian reals (or approximately between U.S.$562 million and
U.S.$656 million) at these currency exchange rates.
On June 25, 2004 the judge hearing the civil action initiated by the Public Ministry Attorneys in the
Federal Court of Brasilia against GTECH Brazil and two of GTECH’s former employees, among others,
granted a procedural injunction ordering that 30% of payments to be paid to GTECH Brazil from CEF
after the date of the injunction be withheld and deposited into an account maintained by the court. The
court also ordered that assets of GTECH Brazil, with certain exceptions, be identified to the court so as to
prevent their transfer or disposition. GTECH filed an appeal of this procedural injunction, and on
March 22, 2005, a panel of judges of the Brazilian Federal Court of Appeals issued an order discontinuing
the withholding of payments due to GTECH Brazil from CEF, removing the restrictions on the transfer or
sale of GTECH’s Brazilian assets, and requiring the return to GTECH of amounts in excess of 40 million
Brazilian reals that had been held in escrow pursuant to the procedural injunction, thereby permitting the
return to GTECH of approximately U.S.$11 million of the approximately U.S.$26 million held in escrow as
of February 26, 2005, the last day of GTECH’s fiscal 2005. GTECH has appealed the Court of Appeals
decision with respect to the continued withholding of 40 million Brazilian reals in a court account, and the
deadline for the Public Ministry Attorneys to appeal this decision of the Court of Appeals has expired. See
‘‘Business—GTECH—Legal Proceedings—The CEF Contract Proceedings’’.
A preliminary report issued in January 2006 by a special investigating panel of the Brazilian congress
recommended that the Public Ministry Attorneys indict more than 30 people, including one current and
three former employees of GTECH Brazil, alleging that these individuals helped GTECH to illegally
obtain an extension of its contract with CEF in 2003. The Brazilian Federal Police are conducting a related
investigation in connection with the award of, and performance under, certain of GTECH Brazil’s
contracts with CEF.
39
The preliminary report also recommended that GTECH’s contract with CEF not be extended past the
termination of its current contract term in May 2006. Additionally, CEF has announced its intention to
develop a central in-house system to replace the services provided by GTECH. Therefore, GTECH does
not anticipate that its contract with CEF will be extended on a long-term basis, if at all. Revenue under
GTECH’s contract with CEF attributable to the National Lottery of Brazil accounted for approximately
11.1% of its revenues in fiscal 2006. If GTECH determines that, upon the expiration of this contract, a
substantial liquidation of its investment in Brazil results, then accumulated foreign currency translation
losses related to GTECH’s operations in Brazil of U.S.$48.4 million (which are recorded in Accumulated
Other Comprehensive Loss in GTECH’s consolidated balance sheet at February 25, 2006) would be
recorded as a charge to GTECH’s consolidated income statement upon the contract’s expiration. See
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations—GTECH’’.
The anticipated loss of this contract could have a material adverse effect on GTECH’s results of
operations, business or prospects.
In June 2003, the Brazilian Federal Court of Accounts (‘‘TCU’’) issued a summons to GTECH based
on allegations in a May 2003 audit report in respect of an audit conducted by the TCU of GTECH’s 1997
CEF contract. The central allegation of the 2003 report was that GTECH was accorded certain payment
increases with respect to lottery services and that it contracted to supply to CEF certain lottery services
that were not contemplated by the procurement process for the 1997 contract and that are not otherwise
permitted under Brazilian law. As a result, the TCU is alleging that GTECH should be required to repay
an amount, still to be approved by TCU judges, equivalent to approximately U.S.$14 million, based on the
currency exchange rates in effect on February 25, 2006. In June 2005, the TCU issued a second preliminary
report with respect to GTECH’s contracts with CEF. Although GTECH has not been formally served with
this report, GTECH understands that it alleges improper transfer of the 1997 contract to GTECH,
payment increases inconsistent with the procurement process for the 1997 contract and in violation of
Brazilian law and that the 2003 contract extension was entered into in a manner inconsistent with the
procurement process and Brazilian law. As a result, the 2005 report seeks repayment by GTECH of an
amount equivalent to approximately U.S.$140 million, based on the currency exchange rates in effect on
February 25, 2006.
GTECH may not prevail in any of these legal proceedings. If GTECH is not successful in defending
these legal proceedings, it could incur substantial monetary judgments or penalties. A finding of improper
conduct by GTECH or any of its current or former employees attributable to GTECH in any manner or
the prolonged investigation of these matters by governmental or regulatory authorities could have a
material adverse effect on its results of operations, business or prospects, including its ability to retain
existing contracts or to obtain new or renewal contracts. In addition, continuing adverse publicity resulting
from these investigations and related matters could have a material adverse effect on GTECH’s reputation
and business. In addition, whether or not GTECH is successful in defending these legal proceedings, the
proceedings may occupy substantial time and attention of its senior management.
See ‘‘Business—GTECH—Legal Proceedings—The CEF Contract Proceedings’’ for more detailed
information regarding these legal proceedings and investigations and related matters.
GTECH’s lottery operations are dependent upon its continued ability to retain and extend its existing contracts
and win new contracts.
GTECH derives the majority of its revenues and cash-flow from its portfolio of long-term facilities
management contracts. Upon the expiration of a contract, lottery authorities may award new contracts
through a competitive procurement process. In addition, GTECH’s lottery contracts typically permit a
lottery authority to terminate the contract at any time for failure to perform and for other specified
reasons, and many of GTECH’s contracts permit the lottery authority to terminate the contract at will with
limited notice and do not specify the compensation, if any, to which GTECH would be entitled were such
termination to occur.
40
In addition, in the event that GTECH is unable or unwilling to perform, some of its lottery contracts
permit the lottery authority to acquire title to its system-related equipment and software during the term of
the contract or upon the expiration or earlier termination of the contract, in some cases without paying
GTECH any compensation related to the transfer of that equipment and software to the lottery authority.
The termination of or failure to renew or extend one or more lottery contracts, the renewal or
extension of one or more lottery contracts on materially altered terms or the loss of its assets without
compensation could, depending upon the circumstances, have a material adverse effect on GTECH’s
results of operations, business and prospects.
Slow growth or declines in sales of on-line lottery goods and services could lead to lower revenues and
cash-flows for GTECH.
In recent years, as the United States lottery industry has matured, the rate of lottery sales growth has
moderated and certain of GTECH’s customers have from time-to-time experienced a downward trend in
sales. These developments may in part reflect increased competition that the lottery industry has
experienced in recent years for the consumers’ entertainment dollar, including by virtue of a proliferation
of destination gaming venues, and an increased availability of internet gaming opportunities, as well as the
relative difficulty of attracting younger consumers to playing on-line lottery games. GTECH’s future
success will depend, in part, on the success of the lottery industry, as a whole, in attracting and retaining
players in the face of such increased competition for the consumers’ entertainment dollar (which
competition may well increase further in the future), as well as its own success in developing innovative
products and systems to achieve this goal. GTECH’s future success also will depend, in part, on its ability
to develop innovative products and services to permit it to successfully market transaction processing
goods and services outside of the lottery industry. A failure by GTECH to achieve these goals could have a
material adverse effect on its results of operations, business and prospects.
GTECH derives approximately half of its revenues from jurisdictions outside the United States and is subject
to the economic, political and social instability risks of doing business in these jurisdictions.
GTECH is a global business and derives a substantial portion of its revenue from operations outside
the United States. In particular, in fiscal 2006, GTECH derived approximately 48.9% of its revenues from
its operations outside of the United States and approximately 11.4% of its revenues from its Brazilian
operations alone. Risks associated with GTECH’s international operations include increased governmental
regulation of the on-line lottery industry in the markets where it operates; exchange controls or other
currency restrictions; and significant political instability. Other economic risks that GTECH’s international
activity subjects it to might include inflation, foreign exchange risks (both depreciation and devaluation),
illiquid foreign exchange markets, high interest rates, debt default, unstable capital markets and foreign
direct investment restrictions. Political risks include change of leadership, change of governmental policies,
new foreign exchange controls regulating the flow of money into or out of a country, failure of a
government to honor existing contracts, changes in tax laws and corruption, as well as global risk aversion
driven by political unrest, war and terrorism. Finally, social instability risks include high crime in the
countries in which GTECH operates due to poor economic and political conditions, riots, unemployment
and poor health conditions. These factors may affect GTECH’s work force as well as the general business
environment in a country. In addition, a substantial portion of GTECH’s assets are held outside of the
United States and could be prevented by another country from leaving the country in which they are held.
See Note 26 to the Notes to GTECH’s Consolidated Financial Statements included in this Offering
Circular for additional financial information respecting geographic areas where it conducts business.
The occurrence of any of these events in the markets where GTECH operates could jeopardise or
limit its ability to transact business in those markets in the manner it expects and could have a material
adverse effect on its results of operations, business and prospects.
41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS—GTECH
Introduction
Overview
The following Management’s Discussion and Analysis, or MD&A, is intended to help the reader
understand the financial results of GTECH Holdings Corporation (‘‘GTECH’’). MD&A is provided as a
supplement to, and should be read in conjunction with, GTECH’s financial statements and the
accompanying notes.
The discussion that follows assumes that GTECH continues to operate on a stand alone basis and does
not reflect the potential impact of the proposed Acquisition.
This overview provides guidance on the individual sections of MD&A as follows:
• Forward-Looking Statements—cautionary information about forward-looking statements.
• Potential Change in Control of GTECH—a description of the potential change in control of GTECH.
• GTECH’s Business—a general description of GTECH’s business; GTECH’s growth strategy and
Brazil matters.
• Common Stock Split—information about GTECH’s prior year common stock split.
• New Accounting Pronouncements—a summary of accounting pronouncements that GTECH has not
yet adopted due to a delayed effective date.
• Application of Critical Accounting Policies—a discussion of accounting policies that GTECH
believes are both most critical to its financial condition and results of operations, and requires
management’s most difficult, subjective or complex judgments and estimates.
• Operations Review—an analysis of GTECH’s consolidated results of operations for the three years
presented in its financial statements. GTECH operates in one business—Transaction Processing,
and it has a single operating and reportable business segment. Therefore, GTECH’s discussions are
not quantified by segment results.
• Liquidity, Capital Resources and Financial Position—an analysis of cash-flows, financial position,
contractual obligations and commitments.
• Financial Risk Management and Dividend Policy—information about financial risk management;
interest rate market risk; foreign currency exchange rate risk; and GTECH’s dividend policy.
Unless specified otherwise, the term ‘‘GTECH’’ is used in this MD&A to refer to GTECH Holdings
Corporation and its consolidated subsidiaries included in the consolidated financial statements.
Forward-Looking Statements
Statements contained in this section and elsewhere in this report which are not historical statements
constitute ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934. Generally, the words ‘‘believe,’’ ‘‘expect,’’ ‘‘estimate,’’
‘‘anticipate,’’ ‘‘will,’’ ‘‘may,’’ ‘‘could,’’ ‘‘plan,’’ ‘‘continue’’ and similar expressions identify forward looking
statements. See ‘‘Forward-Looking Statements’’.
Potential Change in Control of GTECH
On January 10, 2006, GTECH entered into an agreement and plan of merger with Lottomatica,
whereby Lottomatica would acquire GTECH for U.S.$35.00 in cash per outstanding GTECH share. The
112
machine games and customized solutions for dynamic gaming operations. GTECH expects this transaction
will close by December 2007.
In fiscal 2005 GTECH acquired one privately-held company, Billbird S.A. (‘‘BillBird’’), that
strengthened its growth strategy in Commercial Services.
GTECH’s Commercial Services market includes the processing and transmission of commercial,
non-lottery transactions including debit and credit card transactions (both acquiring and issuing
processing), bill payments, electronic tax payments, pre-paid utility payments and pre-paid cellular
telephone recharges. Currently, GTECH’s networks in Brazil, Poland, Chile, the Czech Republic, Jamaica
and other countries process debit and credit card transactions, bill payments and other commercial services
transactions. In the near term, GTECH expects to concentrate its efforts to grow commercial services
revenues principally in Central and Eastern Europe and other selected emerging economies, with the goal
of leveraging its existing technology, infrastructure and relationships to drive growth in Commercial
Services.
In addition, GTECH will continue to identify and evaluate a variety of selective opportunities for
acquisitions in the Lottery, Gaming Solutions, and Commercial Services markets, as well as investing in
growth through licensing when the right opportunities present themselves.
Brazil Matters
GTECH Brasil Ltda., GTECH’s Brazilian subsidiary (‘‘GTECH Brazil’’), has provided on-line lottery
services and technology to Caixa Economica Federal (‘‘CEF’’), the Brazilian bank and operator of Brazil’s
National Lottery since 1997. Revenues from GTECH Brazil’s contract with CEF accounted for 11.1% of
GTECH’s total fiscal 2006 revenues, making CEF GTECH’s largest customer in fiscal 2006 based upon
annual revenues.
In June 2004, a ruling (the ‘‘Ruling’’) in a civil action initiated by federal attorneys with Brazil’s Public
Ministry had the effect in fiscal 2005 of materially reducing payments that GTECH Brazil otherwise would
have received from its contract with CEF. The Ruling ordered that 30% of payments subsequent to the
date of the Ruling due to GTECH Brazil by CEF, be withheld and deposited in an account maintained by
the Court. As of February 26, 2005, the total amount withheld and deposited pursuant to the Ruling was
approximately 68 million Brazilian reals, or U.S.$26 million. In fiscal 2005, GTECH did not recognise
service revenues for the payments that were withheld from GTECH Brazil, as realisation of these amounts
was not reasonably assured.
In July 2004, GTECH Brazil filed an appeal of the Ruling and in March 2005, an appellate court
decision ordered that the withholding be discontinued and that all funds currently held in escrow in excess
of 40 million Brazilian reals be returned to GTECH Brazil, which amounted to U.S.$11 million of the
U.S.$26 million withheld as of February 26, 2005. GTECH received and recognised these funds as service
revenue on April 13, 2005. The Ruling also put in place certain restrictions on the transfer or sale of
certain of GTECH’s Brazilian assets. Such restrictions were lifted in March 2005.
The civil action initiated by federal attorneys with Brazil’s Public Ministry also seeks to impose
damages equal to the sum of all amounts paid to GTECH Brazil under contracts that it entered into with
CEF in 1997 (the ‘‘1997 Contract’’) and 2000 (the ‘‘2000 Contract’’), respectively, and certain other
permitted amounts, minus its proven investment costs. The applicable statute under which this action was
brought also permits the assessment of interest and, in the discretion of the court, penalties of up to three
times the amount of the damages imposed. GTECH estimates that through the date of the lawsuit it
received under the 1997 Contract and the 2000 Contract a total of approximately 1.5 billion Brazilian reals
(or approximately 702 million United States dollars at currency exchange rates in effect as of February 25,
2006). In addition, although it is unclear how investment costs would be determined for purposes of this
lawsuit, GTECH estimates that its investment costs through the date of the lawsuit were approximately
115
between 1.2 billion and 1.4 billion Brazilian reals (or approximately between 562 million and 656 million
United States dollars) at currency exchange rates in effect as of February 25, 2006 in aggregate; however,
these investment costs could be disputed by CEF, and are ultimately subject to approval by the court.
In May 2005, GTECH Brazil entered into a new one-year contract with CEF, which expires in
May 2006. While CEF has the right to extend the term of this contract, a preliminary report issued in
January 2006 by a special investigating panel of the Brazilian congress recommended, among other things,
that CEF’s contract with GTECH Brazil not be extended past its May 2006 expiration date. In addition,
CEF has announced its intention to develop a central in-house system to replace the services provided by
GTECH Brazil under its contract with CEF. Therefore, GTECH does not anticipate that its contract with
CEF will be extended on a long-term basis, if at all.
Accumulated foreign currency translation losses related to GTECH’s operations in Brazil of
U.S.$48.4 million (which are recorded in Accumulated Other Comprehensive Loss in GTECH’s
Consolidated Balance Sheet at February 25, 2006), would be recorded as a charge to GTECH’s
consolidated income statement upon the expiration of its contract with CEF should it determine that the
expiration of the CEF contract results in a substantial liquidation of its investment in Brazil.
See ‘‘Business—GTECH—Legal Proceedings—Brazilian Legal Proceedings’’, and Note 15 to the
consolidated financial statements for detailed disclosures regarding this matter.
Common Stock Split
In the second quarter of fiscal 2005, GTECH’s Board of Directors approved a 2-for-1 common stock
split, payable in the form of a stock dividend, which entitled each shareholder of record on July 1, 2004 to
receive one share of common stock for each outstanding share of common stock held on that date. The
stock dividend was distributed on July 30, 2004. All references to common shares and per share amounts
herein have been restated to reflect the stock split for all periods presented.
New Accounting Pronouncements
FASB Statement No. 123R
In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), which is
a revision of FASB Statement No. 123, ‘‘Accounting for Stock-Based Compensation’’. SFAS 123R
supersedes Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’
(‘‘APB 25’’), and amends FASB Statement No. 95, ‘‘Statement of Cash-flows’’. SFAS 123R requires all sharebased payments to employees, including grants of employee stock options, be recognised in the financial
statements based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R must be
adopted no later than the beginning of the first fiscal year beginning after June 15, 2005 (GTECH’s fiscal
2007 first quarter). Early adoption is permitted. GTECH plans to adopt SFAS 123R on the first day of
fiscal 2007 (February 26, 2006).
SFAS 123R permits public companies to adopt its requirements using either the modified prospective
transition (‘‘MPT’’) method or the modified retrospective transition (‘‘MRT’’) method. Under the MPT
method, compensation cost for new awards and modified awards are recognised beginning with the
effective date and the cost for awards that were granted prior to, but not vested as of the effective date, will
be based on the grant date fair value estimate used for SFAS 123 pro forma disclosure purposes. The MRT
method includes the requirements of the MPT method but also permits restatement of all prior periods
presented or only the prior interim periods of the year of adoption. GTECH plans to adopt SFAS 123R
using the MPT method and GTECH intends to use a lattice model to value stock options granted on or
after February 26, 2006.
116
GTECH’s dependence on certain suppliers creates a risk of implementation delays if the supply contract is
terminated or breached, and any delays may result in substantial penalties.
GTECH purchases most of the parts, components and subassemblies necessary for its terminals from
outside sources. It assembles these parts, components and subassemblies into finished products in its
manufacturing facility. While most of the parts, components and subassemblies can be purchased through
more than one supplier, GTECH currently has approximately three material sole source vendors. GTECH
believes that if a supply contract with one of these vendors were to be terminated or breached, it would be
able to replace the vendor. However, it may take time to replace the vendor under some circumstances and
any replacement parts, components or subassemblies may be more expensive, which could reduce
GTECH’s margins. Depending on a number of factors, including the level of the related part, component
or subassembly in GTECH’s inventory, the time it takes to replace a vendor may result in a delay in its
implementation of a lottery system for a customer. Generally, if GTECH fails to meet its performance
schedules under its contracts, it may be subject to substantial penalties or liquidated damages, or even
contract termination.
GTECH’s non-lottery ventures, which are an increasingly important aspect of its business, may fail including
by reason of GTECH’s relative lack of experience in markets outside its core lottery market and, in the case of
ventures into the non-lottery gaming market, the difficulty in obtaining necessary licenses.
GTECH’s business prospects and future success depend, in part, upon its ability to expand its
transaction processing services into complementary and parallel markets outside of its core lottery market.
In fiscal 2006, commercial services transaction processing represented approximately 9% of GTECH’s
total revenues and non-lottery gaming represented approximately 7% of its total revenues. By way of
comparison, in fiscal 2003 approximately 5% of GTECH’s total revenues were derived from commercial
services transaction processing, and approximately 2% of its total revenues were derived from non-lottery
gaming. With GTECH’s acquisition in May 2003 of a controlling equity interest in PolCard; the acquisition
in September 2004 of BillBird S.A., the leading provider of electronic bill payment services in Poland; and
GTECH’s December 2004 agreement to acquire a 50% controlling equity position in Atronic, a video slot
manufacturer, GTECH expects non-lottery ventures to become increasingly significant to its overall
financial performance. Because GTECH has less experience in non-lottery markets than it has in its core
lottery market, GTECH’s non-lottery ventures present an enhanced element of risk for it. GTECH’s
non-lottery ventures outside the United States are particularly sensitive to the economic and political risks
of doing business in these countries, including non-United States currency exchange risks. In addition,
GTECH’s ability to complete the acquisition of a 50% controlling equity interest in Atronic, and otherwise
to expand into non-lottery gaming markets, is dependent upon its success in obtaining required non-lottery
gaming licenses in numerous jurisdictions. Obtaining such licenses is in many cases difficult, and there can
be no assurance that GTECH will be granted all non-lottery gaming licenses for which it applies or, if
granted, that such licenses will be granted in a time frame necessary to insure the success of its non-lottery
ventures. As non-lottery services start to represent a more significant portion of GTECH’s operations, the
failure of one or more of its non-lottery ventures could have a material effect on its results of operations,
business and prospects.
If GTECH is unable to protect its intellectual property or prevent its use by third parties, its ability to compete
in the market may be harmed.
GTECH relies upon its ability to develop and protect its proprietary technology and intellectual
property rights to ensure that its competitors do not obtain technology from GTECH that could allow
them to compete more effectively with GTECH. However, intellectual property laws in the United States
and in non-U.S. jurisdictions may afford differing and limited protection, may not permit GTECH to gain
or maintain a competitive advantage, and may not prevent GTECH’s competitors from duplicating its
45
products, designing around its patented products, or gaining access to its proprietary information and
technology.
Although GTECH takes measures intended to prevent disclosure of its trade secrets through
nondisclosure and confidentiality agreements and other contractual restrictions, GTECH may not be able
to prevent the unauthorised disclosure or use of its technical knowledge or trade secrets. For example,
there can be no assurance that consultants, vendors, former employees or current employees will not
breach their obligations regarding non-disclosure and restrictions on use. In addition, anyone could seek to
challenge, invalidate, circumvent or render unenforceable any GTECH patent(s). GTECH cannot provide
assurance that any pending or future patent applications it holds will result in an issued patent, or that, if
patents issue, they would necessarily provide meaningful protection against competitors and competitive
technologies and/or adequately protect GTECH’s then-current products and technologies. GTECH may
not be able to detect the unauthorised use of its intellectual property or take appropriate steps to enforce
its intellectual property rights effectively, and certain contractual provisions, including restrictions on use,
copying, transfer and disclosure of licensed programs, may be unenforceable under the laws of certain
jurisdictions.
GTECH licenses intellectual property rights from third parties. If such third parties do not properly
maintain or enforce the intellectual property rights underlying such licenses, or if such licenses are
terminated or expire without being renewed, GTECH could lose the right to use the licensed intellectual
property, which could adversely affect its competitive position or its ability to commercialise certain of its
technologies, products or services.
GTECH intends to enforce its intellectual property rights, and from time to time it may initiate claims
against third parties that it believes are infringing its intellectual property rights if it is unable to resolve
matters satisfactorily through negotiation. Litigation brought to protect and enforce GTECH’s intellectual
property rights could be costly, time-consuming and distracting to management and could fail to obtain the
results sought.
Third-party infringement claims against GTECH could limit or affect its ability to compete effectively.
GTECH cannot provide assurance that its products or methods do not infringe the patents or other
intellectual property rights of third parties. Infringement and other intellectual property claims and
proceedings brought against GTECH, whether successful or not, are costly, time-consuming and
distracting to management, and could harm GTECH’s reputation. In addition, intellectual property
litigation or claims could result in GTECH having to do one or more of the following: (i) cease selling or
using any of its products that allegedly incorporate the infringed intellectual property, (ii) pay substantial
damages, (iii) obtain a license from the third-party owner, which license may not be available on
reasonable terms, if at all, (iv) rebrand or rename its products, and (v) redesign its products to avoid
infringing the intellectual property rights of third parties, which may not be possible and, if possible, could
be costly and time-consuming. The loss of proprietary technology or a successful claim against GTECH
could have a material adverse effect on GTECH’s results of operations, business and prospects.
GTECH’s systems are subject to network interruption risks which could have a negative impact on the quality
of the services offered by GTECH, which could, in turn, negatively impact consumer demand and result in a
decrease in the volume of its customers’ sales and consequently its own revenues.
GTECH’s ability to provide goods and services to its customers depends to a great extent on the
reliability and security of the information technology systems and networks it uses. Information technology
systems and networks used by GTECH are potentially subject to damage and interruption caused by
human error, problems relating to telecommunications networks, natural disasters, sabotage, viruses,
vandalism, fire, water damage, power loss, and similar unexpected adverse events. Interruptions in these
systems could significantly impair GTECH’s operations and reduce the effectiveness and quality of
46
Other Income (Expense)
The components of other income (expense) in fiscal 2006 and fiscal 2005 are as follows:
Fiscal Year Ended
Change
February 25,
February 26,
2006
2005
$
%
(in millions of U.S. dollars)
Minority interest in consolidated subsidiaries
Foreign exchange losses, net . . . . . . . . . . . .
Brazil financial lending tax . . . . . . . . . . . . .
Gain on sale of investment . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
$(3.0)
(2.8)
(1.4)
1.3
1.6
$(3.8)
(1.4)
—
10.9
(0.3)
$ 0.8
(1.4)
(1.4)
(9.6)
1.9
21.1
(100.0)
(100.0)
(88.1)
>100.0
$(4.3)
$ 5.4
$(9.7) (>100.0)
Minority interest in consolidated subsidiaries principally relates to GTECH’s controlling interest in
PolCard.
The U.S.$1.4 million Brazil financial lending tax represents accruals for tax liabilities related to
intercompany loans made to GTECH by its Brazilian subsidiary.
The current year U.S.$1.3 million gain on sale of investment principally resulted from the sale of
GTECH’s 33% interest in Turfway Park to Harrah’s Entertainment and the Keeneland Association. The
prior year U.S.$10.9 million gain on sale of investment resulted from the sale of GTECH’s 50% interest in
Gaming Entertainment (Delaware) L.L.C. to Harrington Raceway, Inc.
Interest Expense
Fiscal Year Ended
Change
February 25,
February 26,
2006
2005
$
%
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$30.8
$19.2
$11.6
60.4
Interest expense increased over last year primarily due to higher average debt balances resulting from
the issuance of U.S.$300 million of Senior Notes in November 2004.
Weighted Average Diluted Shares
Weighted average diluted shares in fiscal 2006 decreased by 2.2 million shares to 130.4 million shares,
primarily due to the impact of prior year treasury share repurchases made under GTECH’s share buyback
program.
Income Taxes
GTECH’s effective income tax rate of 33.7% in fiscal 2006 was down from 35.9% in fiscal 2005. The
decrease is primarily due to a larger percentage of international profits taxed at rates that are lower than
the U.S. statutory income tax rate.
124
Comparison of Fiscal 2005 with 2004
Revenues and Gross Margin
Fiscal Year Ended
Change
February 26,
February 28,
2005
2004
$
%
Domestic lottery . . .
International lottery .
Commercial services
Gaming solutions . . .
All other . . . . . . . . .
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$ 520.6
381.9
84.8
27.4
3.0
$ 504.1
359.5
74.3
16.9
2.6
$ 16.5
22.4
10.5
10.5
0.4
3.3
6.2
14.1
62.1
15.4
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,017.7
239.5
$ 957.4
93.9
$ 60.3
145.6
6.3
>100.0
$1,257.2
$1,051.3
$205.4
19.6
Fiscal Year Ended
February 26,
2005
Service gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.4%
34.1%
February 28,
2004
43.8%
36.9%
Change
Percentage Points
(4.4)
(2.8)
The 3.3% increase in domestic lottery service revenues was primarily due to higher service revenues
from an increase in sales by GTECH’s domestic lottery customers of approximately 6%, the launch of
GTECH’s new service contract in Tennessee and the impact of the Interlott acquisition (in
September 2003), partially offset by contractual rate changes, lower jackpot activity and the extra week of
service revenues in fiscal 2004.
The 6.2% increase in international lottery service revenues includes higher service revenues from an
increase in sales by GTECH’s international lottery customers of approximately 2%, along with favourable
foreign exchange rates and higher jackpot activity, partially offset by lower revenues from Brazil related to
the court order to withhold 30% of GTECH’s revenues.
The 14.1% increase in commercial transaction processing service revenues includes higher service
revenues from an increase in sales by GTECH’s commercial transaction processing customers of
approximately 14%, along with favourable foreign exchange rates and the impact of the BillBird
acquisition, partially offset by lower revenues from Brazil related to the court order to withhold 30% of
GTECH’s revenues.
The 62.1% increase in gaming solutions service revenues was primarily due to the acquisition of Spielo
and the installation of additional video lottery terminals in the state of Rhode Island.
GTECH’s service margins declined 4.4 percentage points from last year primarily due to lower
margins from Brazil related to lower service revenues resulting from the court order to withhold 30% of
GTECH’s revenues along with higher legal costs, and the impact of higher depreciation and amortisation
related principally to acquisitions, contract renewals and the implementation of new contracts.
Product sales were higher principally due to the sale of lottery terminals and a communications
network to GTECH’s customer in Belgium, the sale of a GTECH Enterprise Series central system to
GTECH’s customer in West Lotto, Germany, the sale of lottery terminals to GTECH’s customer in Spain,
and the impact of the Spielo acquisition. GTECH’s product margins fluctuate depending on the mix,
125
Risk Factors Relating to this Offering and the Securities
The Securities are long-term instruments, and Securityholders have only limited rights to receive repayment of
principal prior to the Maturity Date.
The Securities will be redeemed on the Maturity Date and Lottomatica is under no obligation to
redeem the Securities at any time prior to this date, except pursuant to the mandatory redemption
provisions described herein. The Securityholders have no right to call for the redemption of the Securities
prior to their maturity and may only call for an acceleration of the Securities in very limited circumstances,
on the occurrence of certain Enforcement Events. Securityholders should be aware that they may be
required to bear the financial risks of an investment in the Securities for a long period of time.
Lottomatica may redeem the Securities, at its option, upon certain events and on certain dates.
Lottomatica may, at its option, redeem all but not some only of the Securities:
• at their principal amount together with any accrued and unpaid Scheduled Interest Amounts, any
unpaid Optionally Deferred Interest and Equity Funded Deferred Interest, and any Additional
Amounts thereon (i) on the Reset Date or any Floating Rate Payment Date thereafter for any
reason, or (ii) on any date prior to the Reset Date, upon the occurrence of certain withholding tax
events; and
• at the Make-Whole Price upon the occurrence of certain other tax events or a Change of Control
Event, on any date prior to the Reset Date.
There is no guarantee that Lottomatica may choose to exercise such early redemption options, and
Securityholders should be aware that they may be required to bear the risks of their investment in the
Securities until their maturity. Following any such redemption, Securityholders may not be able to reinvest
their funds in instruments with a comparable yield.
Early redemption may adversely affect the Securityholders’ return on the Securities.
The Securities are subject to mandatory early redemption in the event that (i) the Merger Agreement
is terminated in accordance with its terms or (ii) the Acquisition is not completed by October 10, 2006. The
Securities may, therefore, be redeemed at a time when prevailing interest rates are relatively low. As a
result, Securityholders may not be able to re-invest the redemption proceeds in a comparable security with
an effective rate equal to that of the Securities.
Securityholders may incur a loss if Lottomatica is required to, or elects to, defer interest payments under the
Securities.
Lottomatica may at its discretion elect to defer payment of scheduled interest at any time. In addition,
Lottomatica may be required to exercise its discretion to elect to defer payments of interest pursuant to its
obligations under the Senior Credit Facilities. Any interest so deferred is referred to as ‘‘Optionally
Deferred Interest’’. Optionally Deferred Interest may be paid by Lottomatica at its discretion in cash at
any time, but there is no assurance that Lottomatica will elect to settle such amounts in the future.
Optionally Deferred Interest will not itself accrue interest and will only become payable after a period of
10 years, or earlier upon the occurrence of certain limited events.
Furthermore, if, on the tenth business day prior to any Interest Payment Date, a Mandatory Deferral
Event occurs, Lottomatica must defer payments of scheduled interest on the Securities, except in certain
limited circumstances. A Mandatory Deferral Event is deemed to occur when the Coverage Ratio is less
than 1.35. Any interest so deferred is referred to as ‘‘Mandatorily Deferred Interest’’. Mandatorily
Deferred Interest will not itself accrue interest and will only become payable after a period of 10 years, or
earlier upon the occurrence of certain limited events. See ‘‘Terms and Conditions of the Securities—
49
Deferrals of Interest—Optional deferral of interest’’ and ‘‘—Mandatory deferral of interest’’. Optionally
Deferred Interest after remaining unpaid for a period of five years, and Mandatorily Deferred Interest are
together referred to herein as ‘‘Equity Funded Deferred Interest’’.
Securityholders have limited rights to enforce payment or the performance of Lottomatica’s obligations, under
the Securities and may only accelerate the Securities upon limited Enforcement Events.
Securityholders have limited rights to enforce payment or the performance of Lottomatica’s
obligations, under the Securities on the occurrence of Enforcement Events. The Securities may only be
declared due and repayable by Securityholders holding not less than 25% in aggregate principal amount of
the outstanding Securities in the event that (i) Lottomatica does not settle any Equity Funded Deferred
Interest on or before the tenth anniversary of the Interest Payment Date on which it was first deferred,
(ii) Lottomatica breaches the Capital Restriction, or (iii) on the occurrence of certain insolvency events
relating to Lottomatica.
Securityholders may not accelerate the Securities in the event that Lottomatica does not pay any
unpaid Optionally Deferred Interest by 15 days after the due date for payment thereof, but may only sue
for such unpaid amounts. The rights of Securityholders in other circumstances are limited to initiating
proceedings to compel the performance of Lottomatica’s obligations and, in certain circumstances, such
action may only be taken if Lottomatica has defaulted in the performance or observance of such
obligations for at least 60 days.
Risks Relating to Italian Usury Laws.
Italian Law No. 108 of March 7, 1996 introduced legislation preventing lenders from applying interest
rates higher than certain rates (the ‘‘Usury Rates’’) set by the Italian Treasury on a quarterly basis and
published in a decree. If the interest rate applicable to the Securities from time to time is higher than the
Usury Rates, such interest may be deemed void and unenforceable by the court, and thus such interest may
not be due. Applicable Usury Rates may vary depending upon certain characteristics of the recipient of the
relevant payment.
In addition, even where the applicable Usury Rates are not exceeded, the interest rate applicable to
the Securities may be held to be usurious if: (i) it is considered to be disproportionate to the amount lent
(taking into account the specific circumstances of the transaction and the average rate applicable to similar
transactions in the market) and (ii) Lottomatica is deemed to have been in financial and economic
difficulties at the time the Securities were issued.
There can be no assurance that a judge would give effect to the provisions governing the rate of
interest on the Securities, or that the contractual provisions relating to such interest would not be deemed
void and unenforceable.
Lottomatica may not be able to issue sufficient ordinary shares to settle unpaid Equity Funded Deferred
Interest. Accordingly, Lottomatica may not be able to promptly settle Equity Funded Deferred Interest.
Lottomatica’s ability to settle Equity Funded Deferred Interest is constrained by a requirement to
fund such payments out of the proceeds of the issuance and sale of ordinary shares to third parties, or
irrevocable capital contributions made by its shareholders. See ‘‘Terms and Conditions of the Securities—
Deferrals of Interest—Equity Funding of Equity Funded Deferred Interest’’. There can be no assurance
that Lottomatica will be able to consummate the issue and sale of such ordinary shares nor even be
authorised by its shareholders to issue and sell ordinary shares for such purpose or to obtain any such
capital contributions.
Despite these constraints, Lottomatica is not prohibited from paying dividends on its ordinary shares
while such deferred interest amounts remain unpaid.
50
For as long as any Equity Funded Deferred Interest (or part thereof) remains unpaid, Lottomatica
must, after obtaining all shareholder authorisations for the issue or creation of Issuer Equity, in
compliance with applicable law, promptly fund the full payment in cash of all unpaid Equity Funded
Deferred Interest, using the proceeds of the issue, offer, sale or contribution of Issuer Equity. However,
Lottomatica is not required so to fund Equity Funded Deferred Interest during pendency of any Market
Disruption Event. Lottomatica has undertaken to take all steps necessary (in compliance with applicable
law) to keep available, as of the date of each Annual General Meeting, an amount of ordinary shares that
would enable it to settle in full an amount of Equity Funded Deferred Interest equal to the aggregate of
the scheduled interest expected to accrue on the Securities during at least the two years following the date
of such Annual General Meeting.
Lottomatica cannot give any assurance that it will be able to maintain a sufficient amount of ordinary
shares authorised for issuance to fund any unpaid Equity Funded Deferred Interest, or that its
shareholders will vote in favour of any increases in the amount of ordinary shares authorised for issuance.
In addition, there can be no assurance that market conditions will permit it to issue ordinary shares for
such purposes. If Lottomatica does not issue such ordinary shares or cannot place such ordinary shares on
the market, it will not be able to fund the full payment in cash of outstanding Equity Funded Deferred
Interest.
Lottomatica’s payment obligations under the Securities are subordinated.
Lottomatica’s payment obligations under or in connection with the Securities constitute subordinated
obligations. In the event of (i) the commencement of a voluntary or involuntary liquidation, dissolution or
winding-up of Lottomatica due to corporate action or an administrative and/or court order, or (ii) the
occurrence of any Insolvency Proceedings, subject to applicable bankruptcy law, payments on the
Securities will be subordinated to the full prior payment of all existing and future indebtedness of
Lottomatica arising from any unsubordinated obligations or from subordinated obligations that rank ahead
of the Securities.
Accordingly, in an insolvency of Lottomatica, claims in respect of principal, premium, accrued and
unpaid scheduled interest and Optionally Deferred Interest will, in general terms, rank junior to the claims
of all other unsubordinated and subordinated creditors of Lottomatica (other than holders of claims which
rank pari passu in relation to principal), and senior only to the claims of shareholders and other equity
interests. Claims in respect of Equity Funded Deferred Interest will, in general terms, rank junior to the
claims in respect of principal, premium, accrued and unpaid scheduled interest and Optionally Deferred
Interest. See ‘‘Terms and Conditions of the Securities—Status’’.
In addition, the Intercreditor Deed to be entered into by the Trustee with, among others, the lenders
under the Senior Credit Facilities, reinforces the ranking of the claims of Securityholders by contractually
subordinating the Securities in right of payment to the Senior Credit Facilities on the occurrence of the
above insolvency events in relation to Lottomatica. These subordination and other provisions will:
• provide that upon the occurrence of such insolvency events, claims of Securityholders in respect of
the Securities will be subordinated in right of payment to claims in respect of the Senior Credit
Facilities; and
• include customary turnover provisions by the Trustee for the benefit of the holders of claims in
respect of the Senior Credit Facilities.
A Securityholder by accepting any Security will be deemed to have agreed to the restrictions that will
be contained in the Intercreditor Deed. In addition, the Intercreditor Deed will provide that the parties
thereto, including the Trustee, will enter into any future intercreditor arrangements in the event of any
refinancing, replacement, extension, supplement or restructuring of the Senior Credit Facilities.
51
The terms of the Trust Deed and the Securities do not prevent Lottomatica from incurring further and
additional subordinated or unsubordinated liabilities which may rank senior to the claims of
Securityholders.
In an insolvency of Lottomatica, therefore, Securityholders may recover significantly less than the
holders of unsubordinated and other subordinated indebtedness of Lottomatica.
Insolvency laws applicable to Lottomatica may not be as favourable to the Securityholders as bankruptcy laws
in other jurisdictions.
Lottomatica is incorporated in the Republic of Italy. Lottomatica and its Italian subsidiaries (as well
as any of its subsidiaries whose center of interests is deemed to be the Republic of Italy) will be subject to
Italian insolvency laws. The following is a brief description of certain aspects of insolvency law in the
Republic of Italy as such law might affect the Securityholders. For a detailed description of the Italian
insolvency proceedings, please refer to ‘‘Regulatory Framework’’. The insolvency laws of the Republic of
Italy may not be as favourable to Securityholders’ interests as creditors as the laws of other jurisdictions
with which the Securityholders may be familiar.
Under Italian law, the insolvency (insolvenza) of Lottamatica must be determined and declared by a
court. Insolvency occurs when Lottamatica is no longer able to regularly meet its obligations as they fall
due. Lottomatica, if in financial difficulties, may be subject to one or more of the following types of
proceedings under Italian insolvency laws:
(i) court-supervised pre-bankruptcy composition with creditors (concordato preventivo) (the
‘‘Pre-Bankruptcy Composition’’), pursuant to Royal Decree No. 267 of March 16, 1942, as amended
(the ‘‘Bankruptcy Law’’);
(ii) new extraordinary administration proceedings applicable to large insolvent companies
(amministrazione straordinaria delle grandi imprese in crisi) pursuant to Law No. 39 of February 18,
2004, as amended (the ‘‘New Extraordinary Administration’’);
(iii) extraordinary administration proceedings (amministrazione straordinaria) pursuant to Legislative
Decree No. 270 of July 8, 1999 (the ‘‘Prodi-bis Extraordinary Administration’’);
(iv) court-supervised temporary controlled administration (amministrazione controllata), which will be
superseded following the enactment of Legislative Decree No. 5 of January 9, 2006 (the
‘‘Bankruptcy Law Reform’’), which is expected to come into force shortly;
(v) bankruptcy proceedings (fallimento) pursuant to the Bankruptcy Law (the ‘‘Bankruptcy
Proceeding’’); or
(vi) court-supervised post-bankruptcy composition with creditors (concordato fallimentare) pursuant
to the Bankruptcy Law.
Proposals for composition with creditors. Any composition proposal with Lottomatica’s unsecured
creditors arising in connection with any of the above proceedings and involving a reduction in
Lottomatica’s overall indebtedness must be approved by certain majorities of such unsecured creditors
depending on the proceedings. It is uncertain whether subordinated creditors, such as the Securityholders,
would have the right to vote in relation to such proposals. However, any proposal approved by the relevant
majority of unsecured creditors, as required by law, will be binding on all creditors of Lottomatica,
including the Securityholders, regardless of whether the Securityholders were permitted to vote in relation
to such proposal.
Enforcement Action. During the course of any of the above proceedings, the actions of creditors
(including the Securityholders, or the Trustee on their behalf) are stayed (except in certain cases as
52
permitted by law) until the relevant proceedings are concluded, and Lottomatica would be managed by or
subject to the supervision of, a court-appointed official or an extraordinary trustee, as the case may be.
Creditors’ Committee. The Bankruptcy Law Reform will increase the powers granted to the creditors’
committee which supervises the actions of the trustee in bankruptcy. In particular, the creditors’ committee
may pass resolutions which are binding on the trustee in bankruptcy, and in certain circumstances may be
required to authorise certain actions taken by the trustee in bankruptcy. There can be no assurance that
decisions or resolutions taken by the creditors’ committee would be in line with the interests of the
Securityholders.
Avoidance of transactions. If Lottomatica becomes subject to a Bankruptcy Proceeding, New
Extraordinary Administration or, in certain circumstances, Prodi-bis Extraordinary Administration,
payments made by Lottomatica in favour of the Securityholders or the Trustee on their behalf, prior to the
commencement of the relevant proceeding, may be liable to claw-back by the relevant trustee. In
particular:
• any amounts paid by Lottomatica in respect of principal or interest on, or otherwise in respect of,
the Securities to a Securityholder or the Trustee on its behalf within a period of six months before
the commencement of any of the abovementioned proceedings may be set aside if the trustee of
such proceedings can prove that such Securityholder or the Trustee, as the case may be, in whose
favour such payment was made, was aware or should have been aware that Lottomatica was
insolvent at the time such payment was made. In the event of a set off pursuant to mandatory
provisions of Italian law, any amounts set-off during a one-year period before the commencement
of the proceedings may be requalified and set aside. Pursuant to the Bankruptcy Law Reform, no
claw-back action may be brought (i) after a period of three years from the declaration of
Lottomatica’s bankruptcy, or (ii) in any event after five years from the date on which the relevant
payment was made; and
• any payments of principal, premium or interest by Lottomatica in favour of a Securityholder or the
Trustee on its behalf upon early redemption of the Securities pursuant to any early redemption
option set out in the Securities may be declared ineffective, if made within a period of two years
before the commencement of such proceedings.
Pending Agreements. Pursuant to the Bankruptcy Law Reform, while Lottomatica is subject to any
Bankruptcy Proceeding, its trustee in bankruptcy may decide to continue the performance of outstanding
contracts. The general rule in relation to the New Extraordinary Administration and the Prodi-bis
Extraordinary Administration is that outstanding contracts will continue to be performed, without any
election being required on the part of the trustee of such proceedings. As a result, it may be possible for
Lottomatica to continue to incur new indebtedness during the course of such proceedings. Such
indebtedness may rank senior to claims in respect of the Securities, and holders of such indebtedness may
be entitled to payment of their claims from the assets of Lottomatica before any assets are made available
for distribution to Securityholders.
Admission. In the context of a Bankruptcy Proceeding or Pre-Bankruptcy Composition, interest
would cease to accrue on the Securities upon the declaration of bankruptcy and the filing with the court of
the composition proposal, respectively. Claims arising from the Securities would be admitted to the
applicable insolvency proceedings at their outstanding principal amount. Securityholders may, however,
claim for any interest actually accrued to the date of such declaration or filing, as the case may be.
No prior market for the Securities.
Application has been made to list the Securities on the Luxembourg Stock Exchange. However, there
can be no assurance that the Securities will be accepted for listing or, if listed, will remain listed. The
Securities are new securities for which there is currently no market. There can be no assurance as to the
53
liquidity of any market that may develop for the Securities, the ability of Securityholders to sell such
Securities or the price at which the Securities may be sold. The liquidity of any market for the Securities
will depend on the number of holders of the Securities, prevailing interest rates, the market for similar
securities and other factors, including general economic conditions, and Lottomatica’s financial condition,
performance and prospects. In an illiquid market, the Securityholders might not be able to sell their
Securities at any time at fair market prices.
The Joint Lead Managers have informed Lottomatica that they currently intend to make a market in
the Securities, but they are not, however, obligated to do so, and they may discontinue such market-making
efforts at any time. As a result, there can be no assurance that an active trading market for the Securities
will develop, or if one does develop, that it will be maintained. If an active trading market does not develop
or cannot be maintained, this could have a material adverse effect on the liquidity and trading prices for
the Securities.
Transfers of the Securities may be restricted, which may adversely affect the secondary market liquidity and/or
trading prices of the Securities.
The ability to transfer the Securities may also be restricted by securities laws or regulations of certain
countries or regulatory bodies. See ‘‘Transfer Restrictions’’.
The Securities have not been, and will not be, registered under the U.S. Securities Act or any state
securities laws or the securities laws of any other jurisdiction. Lottomatica is relying on an exemption from
registration under the U.S. Securities Act and applicable state securities laws to offer the Securities in the
United States. Holders of Securities may not offer the Securities in the United States except pursuant to an
exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act
and applicable states securities laws. It is the obligation of each holder to ensure that offers and sales of
Securities within the United States and other jurisdictions comply with applicable securities laws. In
addition, transfers to certain persons in certain other jurisdictions may be limited by law, or may result in
the imposition of penalties or liability. For a description of restrictions which may be applicable to transfers
of the Securities, see ‘‘Transfer Restrictions’’ and ‘‘Plan of Distribution’’.
No voting rights.
Holders of the Securities do not have any right to vote at any shareholders’ meetings of Lottomatica.
Consequently, Securityholders cannot influence, inter alia, any decisions by the Board of Directors of
Lottomatica to defer payments of interest, or any other decisions by shareholders concerning
Lottomatica’s capital structure, including the declaration of dividends in respect of Lottomatica’s ordinary
shares. Securityholders also have no ability to propose or vote on the authorisation by Lottomatica’s
shareholders of Authorised Equity in connection with the funding of Equity Funded Deferred Interest.
Shareholders’ withdrawal rights.
The shareholders of Lottomatica are entitled to withdraw from Lottomatica on the occurrence of
certain specified events, such as, inter alia:
• an amendment to the by-laws of Lottomatica which affects voting or participation rights;
• a change in Lottomatica’s corporate purposes resulting in a material change in its activities; or
• a transfer of Lottomatica’s registered office or headquarters outside the Republic of Italy.
In such circumstances, the shares of the withdrawing shareholders are offered to other shareholders
on a pre-emptive basis, pro rata to their existing shareholding, and, if not taken up by the shareholders,
such shares are offered to the market. Any shares of a withdrawing shareholder which are not purchased
54
by other shareholders or by the market must be purchased by Lottomatica using its net profits and
distributable reserves.
If there are no net profits or distributable reserves available for this purpose or if Lottomatica is
otherwise prevented from purchasing the shares, the directors of Lottomatica are required by the Italian
Civil Code to call a shareholders’ meeting to resolve on a reduction of share capital in relation to such
shares or, alternatively, the winding-up and liquidation of Lottomatica.
If Lottomatica purchases such shares while any Equity Funded Deferred Interest (as defined herein)
remains unpaid, an Enforcement Event (as defined herein) may be triggered under the Securities, which
may allow Securityholders to declare the Securities due and repayable and to institute steps to obtain a
judgment against Lottomatica for all amounts due.
However, in the event of the commencement of a voluntary or involuntary liquidation, dissolution or
winding-up of Lottomatica or the occurrence of any Insolvency Proceedings following the exercise of such
withdrawal rights by its shareholders, but prior to the repurchase or liquidation of their shares and the
payment therefor being received, there may be a risk that in such proceedings a court may treat the
amounts owed to the withdrawing shareholders in respect of the shares to be repurchased as indebtedness
of Lottomatica, rather than as an equity claim. In such circumstances there is a risk that holders of
ordinary shares may recover amounts due to them in respect of such ordinary shares prior to amounts
being paid to the Securityholders.
U.S. federal income tax classification of Securities, taxable income recognition.
There is substantial uncertainty regarding the appropriate classification of the Securities for U.S.
federal income tax purposes, and no rulings have been or will be sought from the Internal Revenue Service
(the ‘‘IRS’’) with respect to this classification. In addition, it is possible that U.S. Holders (as defined in
‘‘Certain United States Federal Income Tax Considerations for U.S. Holders’’ below) of Securities may
recognise taxable income with respect to the Securities in excess of cash payments actually made with
respect to the Securities in a given year. U.S. holders should consult their tax advisors as to the proper
classification of the Securities for U.S. federal income tax purposes and the risk of taxation without the
receipt of corresponding cash payments.
55
USE OF PROCEEDS
The net proceeds from the issuance of the Securities in this offering are expected to be approximately
A725.0 million, after deducting the Joint Lead Managers’ fees and commissions and estimated offering
expenses. Lottomatica intends to use such proceeds, together with the proceeds from the Rights Offering,
the borrowings incurred by Acquisition Subsidiary under the Term Facilities, together with available cash
on hand of GTECH and Lottomatica, to finance the Acquisition and repay GTECH indebtedness. See
‘‘The Transactions’’ for a description of the sources and uses of funds relating thereto. This offering is not
conditional upon the Rights Offering or consummation of the Acquisition. If (i) the Merger Agreement
relating to the Acquisition is terminated in accordance with its terms or (ii) the Acquisition is not
completed by October 10, 2006, the Securities will be redeemed at 101% of their aggregate principal
amount together with any accrued and unpaid interest thereon. Any such redemption shall be in
compliance with mandatory provisions of applicable Italian law. For further information, see ‘‘Terms and
Conditions of the Securities—Redemption and Purchase—Mandatory Redemption Event’’. Pending the
Acquisition, the Issuer intends to invest the net proceeds in short-term, interest-bearing investment grade
securities.
56
CAPITALISATION AND INDEBTEDNESS
The following table sets forth the cash and cash equivalents, liquid investments, short-term debt and
the capitalisation of Lottomatica as of December 31, 2005 as follows:
(i) on an actual basis; and
(ii) on a pro forma basis after giving effect to this offering of Securities, the Acquisition, the Rights
Offering, the Senior Credit Facilities and the refinancing of the GTECH indebtedness.
The information in this table has been derived from the audited consolidated financial statements of
Lottomatica as of and for the year ended December 31, 2005 and the pro forma information set forth in
‘‘Unaudited Consolidated Pro Forma Financial Information’’ appearing elsewhere in this Offering Circular
and should be read in conjunction with ‘‘The Transactions’’, ‘‘Use of Proceeds’’, ‘‘Unaudited Consolidated
Pro Forma Financial Information’’, ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Lottomatica’’, ‘‘Description of Certain Indebtedness’’, and the consolidated
financial statements and the accompanying notes appearing elsewhere in this Offering Circular. Except as
set forth below, there have been no other material changes to Lottomatica’s capitalisation since
December 31, 2005.
As of December 31, 2005
(actual)
pro forma(5)
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquid investments(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
246,163
29,357
—
250,367
Total short-term debt(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,260
29,420
Long-term debt:
Payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.80% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,210
—
358,916
1,880,861
724,840
358,916
Total long-term Debt(3)(4) (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
360,126
2,964,617
Shareholders’ equity:
Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,009
1,489,009
Total shareholders’ equity before minority interest . . . . . . . . . . . .
504,694
1,894,746
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,561
12,222
Total shareholders’ equity (b) . . . . . . . . . . . . . . . . . . . . . . . . . . .
512,255
1,906,968
Total capitalisation (a+b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
872,381
4,871,585
(1) Liquid investments are defined as marketable securities available for sale, characterised by high liquidity and highly stable value.
(2) Excludes current portion of long-term debt of A473,000.
(3) Long-term debt does not include GTECH’s outstanding senior notes at February 25, 2006, comprising: approximately
U.S.$148.8 million in aggregate principal amount of 5.25% senior notes due December 2014; approximately U.S.$249.7 million in
aggregate principal amount of 4.75% senior notes due October 2010; and approximately U.S.$149.7 million in aggregate
principal amount of 4.50% senior notes due December 2009. The terms of the Senior Credit Facilities require that GTECH
exercise (or cause the exercise of) the call options under the terms of these senior notes within five business days after
completion of the Acquisition. Approximately A458.0 million of the amount shown above as ‘‘Payable to banks’’ on a pro forma
basis represents the portion of the Term Facility B Loans expected to be drawn to repay such senior notes and related expenses.
(4) Includes current portion of long-term debt of A473,000.
(5) For more information about the pro forma adjustments, please see ‘‘Unaudited Consolidated Pro Forma Financial Information’’
included in this Offering Circular.
57
THE TRANSACTIONS
The following is a summary of the structure of, and the conditions to the completion of, the Transactions.
This summary is not complete. For more information on the terms of the Transactions, prospective investors
should read the Merger Agreement, a copy of which is available upon request from Lottomatica. The closing of
this offering is not conditional on the completion of the Acquisition.
The Acquisition
On January 10, 2006, Lottomatica, Holdings, Acquisition Subsidiary and GTECH entered into an
agreement and plan of merger (the ‘‘Merger Agreement’’) whereby Acquisition Subsidiary will merge with
and into GTECH, with GTECH remaining as the surviving corporation and thereby becoming a direct
wholly-owned subsidiary of Holdings and an indirect wholly-owned subsidiary of Lottomatica. At the
effective time of the Merger, each outstanding share of GTECH common stock (other than shares owned
by Lottomatica, GTECH or their respective subsidiaries that will be cancelled and by holders who vote
against the Merger and properly elect to exercise appraisal rights under Delaware law) will be converted
into the right to receive U.S.$35.00 in cash. GTECH expects to have approximately 132.8 million shares of
common stock outstanding on a fully diluted basis (applying the treasury method), including options and
shares issuable upon conversion of convertible debt, at the effective time of the Merger. The total value of
the Acquisition is approximately A4.0 billion, including the assumption of GTECH’s existing debt.
The Acquisition is expected to be completed by mid-2006. In the event that the Acquisition is not
consummated on or before October 10, 2006, either Lottomatica or GTECH may terminate the Merger
Agreement; provided that such termination right is not available to any party whose action or failure to act
was a principal cause of or resulted in the failure of the Acquisition to occur on or before such date and
such action or failure to act constitutes a breach of the Merger Agreement.
The Merger Agreement includes customary representations, warranties and covenants by the
respective parties. Consummation of the Acquisition is subject to the affirmative vote of holders of a
majority of the outstanding shares of GTECH common stock, receipt of financing to fund the Acquisition,
the merger control regulations of the European Union and other closing conditions, including:
• the absence of a material adverse effect (as defined therein);
• the percentage of GTECH’s common stock for which holders have properly demanded appraisal of
such shares under Section 262 of the Delaware General Corporation Law shall not be greater
than 10%;
• GTECH shall not be in breach of, to the extent such breach would, nor shall there have occurred
any other event that would be reasonably likely to, permit the counterparties to terminate the
agreement pursuant to which GTECH is to acquire a 50% controlling equity position in the Atronic
group of companies (a producer of entertaining games and products, including dynamic casino
management and linked gaming solutions), and a related amendment thereto shall be in full force
and effect;
• GTECH shall have unencumbered cash and marketable securities on hand of U.S.$370.0 million;
• Lottomatica shall have obtained and maintained a corporate and senior loan credit rating of at least
Baa3/BBB- by Moody’s and S&P, respectively, on a pro forma post-merger basis; and
• the absence of any temporary restraining order, preliminary or permanent injunction or other
judgment or order issued by any court or agency of competent jurisdiction or other applicable law
preventing the consummation of the transaction.
58
In addition, consummation of the Acquisition is subject to:
(i) receipt of consents expressly required for a change in control under GTECH’s Georgia, Illinois,
New York and Rhode Island lottery contracts;
(ii) receipt of reasonably satisfactory oral or written confirmation that the consummation of the
Acquisition will not result in the termination of, or the commencement of formal termination
procedures in respect of, specified material lottery contracts representing at least 87.5% of the
aggregate revenues pursuant to all such specified lottery contracts over the 12-month period
ending November 30, 2005. The specified lottery contracts are: Texas, California, Florida,
Michigan, Missouri, New Jersey, Ohio, Wisconsin and the United Kingdom. The failure to
receive confirmation with respect to any of the Texas, California and United Kingdom contracts
will cause this condition not to be satisfied; and
(iii) no termination of, and no commencement or receipt of written notice of commencement of
formal termination procedures (except to the extent withdrawn or terminated) in respect of
(a) any of the lottery contracts specified in paragraph (i) above and (b) lottery contracts specified
in paragraph (ii) above representing at least 90% of the aggregate revenues pursuant to all such
lottery contracts over the 12-month period ending November 30, 2005. The termination of, or
commencement or receipt of written notice of commencement of formal termination procedures
(except to the extent withdrawn or terminated) in respect of, any of the Texas, California, United
Kingdom and Michigan contracts (as well as any of the contracts specified in the first bullet
above) will cause this condition not to be satisfied.
The Merger Agreement contains certain termination rights for Holdings and GTECH and further
provides that, upon termination of the Merger Agreement under specified circumstances, either party may
be required to pay a termination fee. In the event a termination fee is payable by Holdings to GTECH, it
will equal U.S.$50,000,000. Lottomatica has guaranteed this payment. In the event a termination fee is
payable by GTECH to Holdings, it will equal U.S.$163,000,000. See ‘‘Risk Factors—Risks Relating to the
Acquisition—Lottomatica has agreed to guarantee the payment of a break-up fee from Holdings to
GTECH in certain circumstances if the financing condition is not satisfied’’.
The Financing
The Acquisition (including the refinancing of certain GTECH indebtedness) will be funded through:
A434 million);
• the proceeds of the A1.4 billion Rights Offering; and
• approximately U.S.$2.26 billion of borrowings under the Term Facilities to be extended to
Acquisition Subsidiary under the Senior Credit Facilities; the borrowings under the Senior Credit
Facilities will be guaranteed by Lottomatica, Holdings and certain U.S. operating subsidiaries of
GTECH.
De Agostini, the majority shareholder of Lottomatica, has agreed, subject to certain conditions, to
subscribe for its full, direct and indirect, pro rata share of the Rights Offering (amounting to approximately
A0.8 billion). For further information, see ‘‘Certain Relationships and Related Party Transactions—The De
Agostini Undertakings’’. Credit Suisse Securities (Europe) Limited and Goldman Sachs International have
(i) as joint lead underwriters agreed, severally and not jointly, subject to certain conditions, to enter into an
underwriting agreement with respect to the Rights Offering (net of shares to be acquired by De Agostini
and any shares which Mediobanca, as beneficiary of a swap agreement covering 6,198,733 ordinary shares
of Lottomatica, may undertake to subscribe for). Credit Suisse International, Credit Suisse, London
59
Branch, Goldman Sachs Credit Partners L.P. and certain other lenders have committed to provide the
financing under the Senior Credit Facilities. In addition, the Joint Lead Managers have agreed, severally
and not jointly, subject to certain conditions, to procure subscribers for, and failing which to subscribe, the
Securities (see ‘‘Plan of Distribution’’). The financings and related commitments are subject to
Lottomatica maintaining a pro forma investment grade corporate credit rating and other customary
conditions. Furthermore, De Agostini and Lottomatica have agreed to enter into lock-up undertakings
consistent with those provided for in similar market transactions. Lottomatica expects that the Combined
Group will maintain an investment grade corporate credit rating and that the new capital structure will
have the flexibility to pay a dividend to shareholders and make investments in growth opportunities.
The Rights Offering
The commitments of Credit Suisse Securities (Europe) Limited and Goldman Sachs International to
underwrite the Rights Offering will be subject to specified conditions, including, among others:
• the validity, enforceability and effectiveness of approval of the Rights Offering by Lottomatica’s
board of directors and its shareholders and related corporate formalities;
• the validity, binding effect and enforceability of the agreements entered into with Lottomatica
and/or De Agostini in respect of the Rights Offering and the Merger Agreement;
• the absence of conflicts with or violations of Lottomatica’s constitutional documents, contracts and
other instruments to which it is a party or applicable laws or regulations, as a result of the execution
or performance of the terms of the underwriting agreement and the Merger Agreement, that could
result in a material adverse effect (which is defined in a manner substantially consistent with that
contained in the Merger Agreement) to the proposed Acquisition or Rights Offering;
• the absence of any breach by Lottomatica or De Agostini of any material obligations under the
underwriting agreement and the Merger Agreement;
• the absence of any circumstances which would make the completion of the proposed Acquisition or
the Rights Offering unlawful, impossible, or reasonably impractical;
• no change in Moody’s and S&P’s public communications as of January 10, 2006, which commit
Moody’s and S&P, respectively, to corporate and indebtedness credit ratings with respect to the
Combined Group of at least Baa3 and BBB– on completion of the Acquisition;
• the absence of a suspension or revocation of trading in respect of Lottomatica’s ordinary shares on
the Borsa Italiana S.p.A. on or prior to the closing of the Rights Offering, subject to specified
exceptions;
• the grant, validity and enforceability of all necessary permits, consents, approvals and
authorisations, and the making of all filings or registrations necessary to consummate the Rights
Offering;
• the absence of any event in relation to the proposed merger or the Rights Offering that could result
in the underwriters acting contrary to any order of any court, arbitral body, administrative body or
any law, regulation, treaty or official directive or request applicable to it;
• the absence of a material adverse effect on Lottomatica, GTECH and their respective subsidiaries,
taken as a whole;
• the absence of a ‘‘market mac’’ (subject to certain specific exceptions), which generally relates to
adverse changes, developments or events in generally prevailing national or international monetary,
financial or economic market conditions or currency exchange rates that, in the reasonable opinion
of the underwriters are material and adverse and likely to prejudice materially the success of the
Rights Offering, as well as any general moratorium on Italian, U.K. or U.S. commercial banking
60
The connectivity that provides the link between the Host and the gaming equipment (amusement with
prize machine) located at the stores is based on two structures developed with the Telecom Italia and Wind
operators.
Today these structures, through the use of point of access modules developed and with different
technologies, make it possible to reach more than 10,000 amusement with prize machines in the different
wireline or wireless modalities, providing a high degree of flexibility with regard to the various needs of the
businesses where the Gaming Machines are located.
Services
The Services business network information technology structure uses POS terminals with point of sale
technology installed at approximately 55,000 points of sale. All top-up (both commercial and processing)
and payment services are provided by these terminals.
In addition to POS terminals the stamp duty service is provided through a Lis Printer. At the moment
approximately 22,000 Lis Printers have been installed, comprising 18,000 Lis Printers installed during 2005
and 4,000 Lis Printers installed during 2006.
Car road tax processing services are still provided through Lotto Terminal and technology platform.
Both POS terminals and Lis Printers are connected to a service dedicated data center in Milan. Each
terminal connects to the data center servers through a dial-up connection.
Efficiency
Recent information technology projects, have been focused on developing a standards-based
information technology architecture, which makes it much easier to incorporate third-party solutions. This
improves the ability of Lottomatica’s information technology architecture to adapt to change and to evolve
in order to better meet new market needs. In particular it provides:
• flexibility: possibility of using cross-border applications that are part of business functionality
independent of the technology platform (service oriented architecture);
• cost development: reduction in costs for software development;
• cost effective maintenance: up-to-date tools for monitoring, development, testing, and training;
• profiling: management of user profiles that access only a sub-set of services;
• optimisation: keeping system resources focused on core transactions;
• integration: introduction of tools for integrated service management;
• multichannel: the possibility of providing the same services on different devices; and
• the development of web-based technologies, which will permit cost reduction for software
distribution and configuration management.
Reliability
Lottomatica believes that the current technology is highly reliable and provides essential continuity of
services.
In particular, for Lotto core systems, the Stratus systems are used, which are classified as faulttolerance technology able to guarantee service availability at greater than 99.995%. The reliability of the
entire service is also enhanced by the use of automated remote telediagnosis procedures which are
designed to detect major terminal malfunctions and notify in real time the people in charge of servicing the
terminals.
156
• receipt of customary corporate documentation.
The Securities Offering
The Joint Lead Managers have entered into a subscription agreement pursuant to which they will
agree to procure subscribers for, and failing which, to subscribe, for the Securities. The obligations of the
Joint Lead Managers are subject to specified conditions including, among others:
• negotiation, execution and delivery of definitive financing documentation;
• the absence of any material adverse effect (which is defined in a manner substantially consistent
with that contained in the Merger Agreement) affecting Lottomatica, GTECH and their respective
subsidiaries, taken as a whole;
• no change in Moody’s and S&P’s public communications as of January 10, 2006, which commits
Moody’s and S&P, respectively, to issue corporate and indebtedness credit ratings with respect to
the Combined Group of at least Baa3 and BBB- on completion of the Acquisition;
• receipt of required consents and approvals in connection with the issue of the Securities;
• validity and enforceability of the definitive financing documents and merger documents, which shall
not be in conflict with the constitutional documents of Lottomatica, applicable law, or any contract
or other agreement or instrument to which Lottomatica is a party;
• the accuracy of specified representations relating to GTECH and Lottomatica;
• receipt of legal opinions and comfort letters;
• payment of fees and expenses incurred in connection with the issue of the Securities; and
• receipt of customary corporate certificates and related deliverables.
As of May 2, 2006 S&P has provisionally attributed a BBB corporate credit rating to the Issuer and a
BB+ rating to the Securities; and Moody’s has newly attributed a provisional Baa3 corporate family rating
to the Issuer, and a Ba3 provisional rating to the Securities.
Repayment of GTECH’s existing indebtedness
As of February 25, 2006, GTECH had three series of senior notes outstanding:
December 2014;
October 2010; and
December 2009.
The terms of the Senior Credit Facilities require that GTECH exercise (or cause the exercise of) the
call options under the terms of these senior notes within five business days after completion of the
Acquisition.
Generally, under the terms of the indentures applicable to these senior notes, GTECH may redeem
all or part of the senior notes prior to their maturity at any time on at least 30 days’ notice, at a redemption
price equal to the greater of (i) 100% of the principal amount of the senior notes being redeemed and
(ii) the sum of the present values of the principal amount of the senior notes being redeemed and the
remaining scheduled payments of interest on such senior notes, discounted from their respective scheduled
payment dates to the redemption date on a semi-annual basis at the treasury rate (as defined in the
62
relevant indentures) plus 20 basis points, in the case of the 5.25% notes, 20 basis points, in the case of the
4.75% notes, and 15 basis points, in the case of the 4.50% notes, plus, in each case, accrued interest to the
redemption date. Lottomatica anticipates costs of approximately U.S.$10.0 million in connection with the
refinancing of such indebtedness.
As of April 25, 2006, there was approximately U.S.$6.0 million in aggregate principal amount of
GTECH’s Convertible Debentures outstanding and, if still outstanding following completion of the
Acquisition, will become convertible into cash. Such Convertible Debentures are currently convertible into
shares of GTECH common stock.
In addition, GTECH has a U.S.$500 million credit facility which is undrawn as of March 31, 2006,
excluding U.S.$2.5 million of letters of credit. This existing credit facility will be terminated upon, or prior
to, the effectiveness of the Merger.
Sources and Uses
The table below represents a summary of the sources and uses of funds required to (a) acquire 100%
of the share capital of GTECH, (b) refinance certain specified indebtedness ((a) and (b) together, the
‘‘Transaction’’) and (c) pay related Transaction fees and expenses.
Sources and Uses of Funds(1)
Sources of Funds
Senior Term
Facilities . . . . . . .
Securities offered
hereby . . . . . . . . .
Cash—Lottomatica .
(in millions of
U.S. dollars)
(in millions of
euro)
2,260
(in millions of
U.S. dollars)
Transaction fees . . .
44
Purchase price . . . .
4,648(2)
Refinancing of
Indebtedness . . . .
560(3)
(in millions of
euro)
111
—
—
135
750
—
Cash—GTECH . . . .
Rights Offering . . . .
390
—
—
1,400
Total Sources . . . . .
2,785
2,150
Total Sources at
assumed exchange
rate: . . . . . . . . . .
Uses of Funds
Total Uses . . . . . . .
Total Uses at
assumed exchange
rate: . . . . . . . . . .
E4,452
5,252
—
111
E4,452
(1) For purposes of this Table, an exchange rate of A1.00=U.S.$1.21 has been assumed. This assumption may differ from the current
spot rate of exchange because in January 2006, after the announcement of the Transaction, Lottomatica entered into hedging
agreements for an aggregate notional amount of A2,050 million securing a weighted average exchange rate of U.S.$1.2116 per
A1.00. The cost incurred or to be incurred for such hedging agreements is included in the estimate of Transaction fees and
expenses set forth above.
(2) Computed based on 132.8 million shares of GTECH common stock expected to be outstanding on a fully diluted basis (applying
the treasury method), including options and shares issuable upon conversion of the Convertible Debentures (assuming 100%
conversion), at the effective time of the Acquisition. Assumes that none of the GTECH shareholders has elected to exercise
appraisal rights under Delaware law.
(3) Includes approximately U.S.$10 million of costs in connection with the repayment of the GTECH indebtedness.
63
The award of the concession to the joint venture has been the subject of a number of challenges by the
other participants to the tender that may be summarised as follows:
(a) appeal brought by Sisal: Sisal abandoned this suit at a hearing on April 10, 2002, thus this action
may be considered definitively concluded;
(b) appeal filed by Autogrill, GTECH Corporation, Oberthur Gaming Technologies S.a.S. and others
(collectively, ‘‘CONSIRIUM’’): CONSIRIUM abandoned its request for suspension at a hearing
on June 17, 2003. The appeal was then dismissed by the TAR Lazio. A hearing on the merits was
held on November 18, 2003 before the Council of State. During the hearing, the Council of State,
after taking note of the statement submitted by counsel for Lottomatica concerning the
intervening merger of the then Lottomatica into Tyche S.p.A. and the resulting change of the
corporate name of the entity surviving the merger to Lottomatica, declared the suit suspended
pursuant to Article 300 of the Italian Code of Civil Procedure. Subsequently, GTECH
Corporation and Oberthur Gaming Technologies S.a.S. served a notice of reinstatement. At a
hearing on October 28, 2004, GTECH Corporation and Oberthur Gaming Technologies
requested a stay of the proceedings;
(c) appeal of Snai, Venturini e C. S.p.A. (‘‘Venturini’’), Poste Italiane S.p.A. and Ente Tabacchi
Italiani S.p.A. (‘‘ETI’’): Poste Italiane S.p.A. and ETI intervened in an appeal filed by Snai and
Venturini with the purpose of contesting the award of the tender on July 30, 2001. At the hearing
on May 14, 2003, Poste Italiane S.p.A. and ETI requested a stay of the proceedings. On July 21,
2003, Snai and Venturini notified all parties involved that it was renouncing its appeal, making
the adjudication unappealable, after which the concession agreement was signed by the
Consorzio Lotterie Nazionali. In December 2002, the plaintiffs asked the AAMS to award the
contract to them. In a letter dated January 21, 2003, the AAMS responded that it could not award
the contract to them prior to resolution of the dispute. This letter was then challenged by Snai
and Venturini as grounds for the previously filed appeal, and by Poste Italiane S.p.A. and ETI in a
separate appeal. On July 17, 2003, Poste Italiane S.p.A. and ETI filed a motion to schedule a
hearing to resolve the dispute. On July 25, 2003, Poste Italiane S.p.A. and ETI requested that the
AAMS not render a decision until the administrative judge rendered his decision.
In the opinion of Lottomatica, upon advice of its counsel, the appeal by Poste Italiane S.p.A. and ETI
cannot have any effect on the award of the operation of Instant and Traditional Lotteries, which occurred
following the abandonment of the main action by Snai and Venturini e C. S.p.A. and is thus unappealable.
Further, the deadline has passed for Poste Italiane S.p.A. and ETI to contest the award of the operation of
the Instant and Traditional Lotteries to Consorzio Lotterie Nazionali, with the consequence that they
cannot continue with the lawsuit.
Interruption of Network Service
On June 18, 2005, there was an alternating current failure in Lotto collection service in almost all
terminals installed on the data transmission network managed by B.N.L.-Albacom. After a reconfiguration
of the network, completed during the night between June 18 and 19, 2005, the malfunction was corrected
and the transmission lines resumed their normal operation. The AAMS calculated the damage suffered at
approximately A7.5 million and filed a claim for damages on July 7, 2005. On August 12, 2005 Lottomatica
paid to the AAMS the amount claimed by the latter, while contesting the validity of the claim.
In addition, Lottomatica contested the network failure with supplier B.N.L. Multiservizi, while
reserving its right to enforce contractual penalties, claim compensation for additional damages incurred
and cancel the contract. B.N.L. Multiservizi rejected the claims of Lottomatica. On September 14, 2005,
following the payment by Lottomatica of approximately A7.5 million to the AAMS, Lottomatica requested
that B.N.L. Multiservizi reimburse it immediately for said amount. On November 2, 2005, Lottomatica
initiated arbitration proceedings against B.N.L. Multiservizi requesting termination of the contract due to
169
Three Months Ended
March 31,
IFRS
2006
Balance Sheet Data (at End of
Net fixed assets(b) . . . . . . . .
Operating working capital(c) . .
Severance indemnities . . . . .
Period):
. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
IFRS
IFRS
ITA
2005
2004
2004
ITA
2003
828,040
(180,105)
(7,751)
833,522
(223,970)
(7,619)
577,799
(202,002)
(7,105)
545,183
(196,141)
(6,813)
681,557
(102,404)
(5,666)
Net invested capital(d) . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . . . . . . . . .
640,184
579,897
11,871
601,933
504,694
7,561
368,692
312,576
4,770
342,229
286,163
7,631
573,487
400,995
3,818
Long-term loans, incl. current portion(e) . . . . . . . . .
Short-term loans(f) . . . . . . . . . . . . . . . . . . . . . . .
364,394
2,404
360,126
7,260
358,505
3,322
360,599
3,443
361,909
20,288
Total debt(g) . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents(h) . . . . . . . . . . . . . . . .
366,798
(319,834)
367,386
(246,163)
361,827
(241,661)
364,042
(241,595)
382,197
(199,109)
Net debt(i) . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquid investments(j) . . . . . . . . . . . . . . . . . . . . .
46,964
—
121,223
(29,357)
120,166
(64,529)
122,447
(64,129)
183,088
—
Adjusted net debt(k) . . . . . . . . . . . . . . . . . . . .
Total capitalisation(l) . . . . . . . . . . . . . . . . . . . .
46,964
956,162
91,866
872,381
55,637
675,851
58,318
654,393
183,088
766,722
246,163
17,546
(13,871)
69,995
242,184
190,741
(91,298)
(95,464)
197,147
250,495
24,436
(230,417)
199,109
274,225
8,830
(240,569)
120,588
304,199
(146,865)
(78,813)
Cash-flow Data:
Cash and cash equivalents—beginning
—Cash-flows from operating activities
—Cash-flows from investing activities .
—Cash-flows from financing activities
of period
. . . . . . .
. . . . . . .
. . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
Cash-flow for the period . . . . . . . . . . . . . . . . . . .
73,671
3,979
44,514
42,486
78,521
Cash and cash equivalents—ending of period . . . . .
319,834
246,163
241,661
241,595
199,109
Three Months Ended
March 31,
IFRS
IFRS
2006
2005
Other Data:
Revenues(m) . . . . . . . . . . . . . .
EBITDA(n) . . . . . . . . . . . . . .
EBITDA margin(o) . . . . . . . . . .
Capital expenditures . . . . . . . .
Interest expense(p) . . . . . . . . . .
Total debt/EBITDA ratio(q) . . . .
EBITDA/interest expense ratio(r) .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
190,306
111,888
58.8%
14,525
5,124
(*)
21.84x
IFRS
IFRS
ITA
2005
2004
2004
189,135
116,702
61.7%
(**)
4,556
(**)
25.62x
582,674
585,774
265,986
231,880
45.6%
39.6%
93,854
40,104
19,209
17,544
1.38x
1.56x
13.85x
13.22x
ITA
2003
587,534
499,400
272,178
199,616
46.3%
40.0%
55,710
147,591
17,544
17,777
1.34x
1.91x
15.51x
11.23x
(a) Financial income (expense) is defined as interest income plus other financial income minus interest expense minus other
financial expense.
(b) Net fixed assets are defined as the sum of property, plant and equipment, intangible fixed assets, financial assets and goodwill.
(c) Operating working capital is defined as the difference between operating current assets and operating current liabilities.
(d) Net invested capital is defined as net fixed assets minus operating working capital minus severance indemnities.
(e) Long-term loans, including current portion consist of the outstanding on Lottomatica’s 4.80% fixed rate notes due 2008,
amounted to A359.6 million (long-term portion) plus A0.5 million (current portion), as of December 31, 2005. ‘‘Long-term’’
means indebtedness having a maturity of over twelve months.
(f) Short-term loans consist of prizes won but not yet paid and the short-term portion of leasing expenses. ‘‘Short-term’’ means
indebtedness having a maturity of twelve months or less.
(g) Total debt is defined as long-term loans including current portion plus short-term loans.
(h) Cash and cash equivalents are defined as cash on hand plus bank and post account.
(i) Net debt is defined as total debt minus cash and cash equivalents.
65
Jurisdiction
Approximate
Number of Lottery
Terminals Installed(1)
Date of Commencement
of Current Contract
Date of Expiration of
Current Contract Term
Current
Extension
Options*
United States:
Arizona(2) . . . . . . . . . . .
2,600
September 1999
September 2006
—
California . . . . . . . . . . .
19,800
October 2003
October 2009
4 one-year
D.C.(3) . . . . . . . . . . . . .
600
June 1999
November 2009
—
Florida . . . . . . . . . . . . .
12,600
January 2005
March 2011
2 two-year
Georgia . . . . . . . . . . . .
8,200
September 2003
September 2010
—
Idaho(4) . . . . . . . . . . . .
740
February 1999
February 2007
—
Illinois . . . . . . . . . . . . .
8,260
April 2000
October 2007
1 one-year
Kansas . . . . . . . . . . . . .
1,900
July 2002
June 2008
—
Kentucky . . . . . . . . . . .
3,000
April 1997
June 2008
—
Louisiana . . . . . . . . . . .
2,500
June 1997
June 2010
—
Michigan . . . . . . . . . . .
10,900
January 1998
January 2009
—
Minnesota . . . . . . . . . .
3,240
February 2003
February 2011
2 one-year
Missouri . . . . . . . . . . . .
4,230
December 2004
June 2012
—
New Jersey(5) . . . . . . . .
6,100
June 1996
June 2006
—
New Mexico . . . . . . . . .
1,100
June 1996
November 2008
—
New York . . . . . . . . . .
16,200
March 2002
March 2007
3 one-year
North Carolina(6) . . . . .
—
January 2006
March 2013
—
Ohio . . . . . . . . . . . . . .
8,600
August 2000
June 2007
2 two-year
Oregon . . . . . . . . . . . .
3,170
June 1998
June 2008
—
Rhode Island . . . . . . . .
1,220
July 2003
June 2023
—
Tennessee . . . . . . . . . . .
4,480
January 2004
April 2011
—
Texas . . . . . . . . . . . . . .
17,300
August 2002
August 2011
—
Washington(7) . . . . . . . .
4,400
September 1995
June 2006
—
Wisconsin . . . . . . . . . . .
3,800
June 2004
June 2011
2 one-year
International:
Anguilla
—LILHCo . . . . . . . . . .
10
October 1997
October 2007
1 ten-year(8)
Antigua/Barbuda
—LILHCo . . . . . . . . . .
50
January 2000
September 2016
1 ten-year(8)
Argentina
—Loteria National
Sociedad del Estado(9) . .
—Boldt IPLC(9) . . . . . .
800
3,400
November 1993
November 1999
January 2007
November 2009
—
—
Barbados
—LILHCo . . . . . . . . . .
225
June 2005
June 2023
—
178
typically is four years. These contracts usually contain options permitting the relevant lottery authority to
extend the contract under the same terms and conditions for additional periods, generally ranging from
one to three years. In addition, GTECH’s ITVM customers occasionally renegotiate extensions on
different terms and conditions.
Historically, the majority of Interlott’s Facilities Management Contracts have been based on a
compensation structure involving fixed monthly lease payments paid directly by the lottery authorities.
However, GTECH’s recent ITVM Facilities Management Contracts feature a compensation structure
based upon a negotiated percentage of the ITVM instant ticket sales revenues. Under its ITVM Facilities
Management Contracts, GTECH retains title to the ITVMs, while providing its customers with necessary
support services. In most of its ITVM jurisdictions GTECH employs a dedicated work force, consisting of a
Regional Service Manager, marketing personnel, and customer service representatives who help service
and maintain most aspects of the ITVM program.
Product Sales Contracts: Under a typical ITVM Product Sales Contract, for a fixed price GTECH
constructs, sells, delivers and installs a turnkey ITVM system that the lottery jurisdiction subsequently
operates.
The table below sets forth the lottery authorities with which GTECH has ITVM Facilities
Management Contracts (‘‘FMCs’’). This table also provides (except where noted by footnote) historical
information respecting the number of ITVMs that are currently in service, under various ITVM Product
183
Sales Contracts (‘‘PSCs’’). Finally, the table below sets forth information regarding the term of each FMC,
as well as the approximate number of ITVMs installed in each FMC jurisdiction, as of February 25, 2006.
Jurisdiction
Arizona . . . . . .
California . . . . .
Idaho . . . . . . . .
Illinois . . . . . . .
Indiana . . . . . . .
Kentucky . . . . .
Luxembourg . . .
Maine . . . . . . . .
Maryland . . . . .
Massachusetts . .
Minnesota . . . . .
Missouri . . . . . .
New Hampshire
New Jersey . . . .
New Mexico . . .
New York . . . . .
Ohio . . . . . . . . .
Oregon . . . . . . .
Pennsylvania . . .
Rhode Island . .
Texas . . . . . . . .
Virginia(2) . . . . .
Washington . . . .
West Virginia . .
Wisconsin . . . . .
.
.
.
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.
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.
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.
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.
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.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
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.
.
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.
.
.
.
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.
.
FMC
or
PSC
Approximate Number of
ITVMs in service
Date of
Commencement
of Current FMC
Date of Expiration
of Current
FMC Term
Current
Extension
Options
FMC
PSC
PSC
FMC
FMC
PSC
FMC
FMC
PSC
PSC
(1)
FMC
FMC
(1)
FMC
(3)
FMC
PSC
PSC
(1)
FMC
PSC
FMC
PSC
PSC
420
4,200
200
3,400
1,400
1,290
130
150
1,200
1,500
110
630
250
180
150
4,100
1,500
500
3,450
100
1,300
1,500
900
110
500
July 2003
N/A
N/A
June 2004
August 2005
N/A
September 2005
September 2004
N/A
N/A
N/A
June 2001
June 2005
N/A
May 1997
(3)
July 2003
N/A
N/A
N/A
September 2003
N/A
November 2004
N/A
N/A
July 2008
N/A
N/A
September 2010
November 2007
N/A
October 2012
August 2007
June 2008
N/A
N/A
November 2007
June 2008
N/A
June 2007
(3)
June 2007
N/A
N/A
N/A
September 2006
N/A
November 2007
N/A
N/A
—
N/A
N/A
1 three-year
2 one-year
N/A
—
2 two-years
—
N/A
N/A
—
1 two-year
N/A
—
—
N/A
N/A
N/A
2 one-year
N/A
1 three-year
N/A
N/A
(1) Represents ITVMs installed under a GTECH Facilities Management Contract. See Facilities Management Contracts table above
for additional information.
(2) The Virginia Lottery entered into a seven-year contract with Oberthur Gaming Technologies Corporation (OGT) under which
GTECH has subcontracted to provide new ITVMs and management of warehousing and distribution of instant tickets.
(3) GTECH has entered into a contract to supply maintenance services for approximately 4,100 items which are owned by the
New York lottery authority.
Contract Award Process
In the United States, lottery authorities generally commence the contract award process by issuing a
request inviting proposals from various lottery vendors. The request for proposals usually indicates certain
requirements specific to the jurisdiction, such as the number of terminals and breadth of services desired,
the particular games which will be required, particular pricing mechanisms, the experience required of the
vendor and the amount of any performance bonds that must be furnished. After the bids have been
evaluated and a particular vendor’s bid has been accepted, the lottery authority and the vendor generally
negotiate a contract in more detailed terms. Once the contract has been finalised, the vendor begins to
install the lottery system.
GTECH’s marketing efforts for its lottery products and services frequently involve top management in
addition to its professional marketing staff. These efforts consist primarily of marketing presentations to
the lottery authorities of jurisdictions in which requests for proposals have been issued.
184
The table below reconciles EBITDA to Net Income for the periods presented:
Fiscal Year Ended
February 25, 2006 February 26, 2005 February 28, 2004(a)
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . .
$532,183
$484,214
$420,772
Depreciation, amortisation and other . . . . . . . . .
(183,014)
(158,615)
(119,059)
Interest expense . . . . . . . . . . . . . . . . . . . . . .
(30,793)
(19,213)
(10,919)
Income before income taxes . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . .
318,376
(107,331)
306,386
(109,992)
290,794
(107,594)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . .
$211,045
$196,394
$183,200
EBITDA as shown above reflects GTECH’s historical EBITDA computation which includes:
• interest income of U.S.$10.9 million, U.S.$4.6 million and U.S.$5.7 million in fiscal 2006, 2005 and 2004, respectively;
• equity in earnings of unconsolidated affiliates of U.S.$1.9 million, U.S.$2.8 million and U.S.$6.2 million in fiscal 2006, 2005
and 2004, respectively; and
• other income (expense) of U.S.($4.3) million, U.S.$5.4 million and U.S.$1.9 million in fiscal 2006, 2005 and 2004, respectively.
(f) In computing the ratio of earnings to fixed charges, ‘‘earnings’’ consist of income before income taxes, equity income, net of
distributions, minority losses, amortisation of capitalised interest and fixed charges excluding capitalised interest. ‘‘Fixed
charges’’ consist of interest expense, an estimate of interest within rental expense and capitalised interest.
(g) EBITDA margin represents EBITDA for the year divided by total revenues for the year.
(h) Debt/EBITDA ratio represents total debt at the end of the year divided by EBITDA for the year.
(i) EBITDA/interest expense ratio represents EBITDA for the year divided by interest expense for the year.
(j) A lottery customer is defined as a jurisdiction utilising GTECH’s systems or products for traditional lottery services.
69
UNAUDITED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The accompanying pro forma consolidated financial information contains the pro forma consolidated
financial data as of and for the year ended December 31, 2005 of Lottomatica, which give retroactive effect
to the proposed Acquisition and the related financing transactions.
The pro forma consolidated financial data as of and for the year ended December 31, 2005 were
prepared by making appropriate pro forma adjustments to the historical consolidated financial statements
of Lottomatica in order to give effect to the proposed Acquisition, as described below. The pro forma
consolidated financial data follow the schemes adopted by Lottomatica and GTECH for the presentations
of their historical IFRS consolidated financial data.
The consolidated financial statements of Lottomatica as of December 31, 2005 and for the year then
ended prepared in accordance with IFRS as adopted by the EU were audited by Reconta Ernst & Young
S.p.A., which issued its report on March 20, 2006.
The consolidated balance sheet of GTECH as of December 31, 2005 and the related consolidated
income statement for the period from January 2, 2005 to December 31, 2005, prepared in accordance with
IFRS as adopted by the EU (which were used for the preparation of the first complete IFRS financial
statements of GTECH on the effective date of the Acquisition), prepared for the sole purpose of inclusion
herein, were audited by Ernst & Young LLP, which issued its own report on March 14, 2006.
The pro forma consolidated reclassified financial data have been obtained on the basis of:
• the historical consolidated financial data of Lottomatica prepared in accordance with IFRS as
adopted by the EU as of and for the year ended December 31, 2005;
• the historical consolidated financial data of GTECH prepared in accordance with IFRS as adopted
by the EU (which were used for the preparation of the first complete IFRS consolidated balance
sheet of GTECH on the effective date of the Acquisition as of December 31, 2005 and for the
period ended December 31, 2005); and
• the pro forma adjustments reflecting the proposed Acquisition and the related financing
transactions envisaged to complete the proposed Acquisition.
In accordance with CONSOB Communication No. DEM/1052803 of July 5, 2001, the effects of the
Acquisition have been shown retroactively in the pro forma consolidated balance sheet as if the Acquisition
and the related financing transactions had taken place on December 31, 2005 and in the pro forma
consolidated income statement as if they had taken place on January 1, 2005.
The pro forma adjustments made to the consolidated historical financial statements and the scope and
assumptions upon which they are based are described in detail, in paragraphs 1, 2 and 3 of the explanatory
notes below.
With respect to the accounting policies adopted by Lottomatica and GTECH in preparing their
respective historical consolidated financial statements, reference is made to the notes to their respective
consolidated financial statements as of and for the year ended December 31, 2005 prepared in accordance
with IFRS as adopted by the EU, included elsewhere in this Offering Circular.
In order to interpret the pro forma data correctly, it is necessary to bear in mind the following:
• since the pro forma data are prepared based on assumptions, if the Acquisition had taken place at
the dates referred to for the purpose of preparing the pro forma consolidated financial data, instead
of the date at which it is actually expected to take place, the results that are presented therein would
not be necessarily obtained;
• the pro forma data are not a forecast since they are prepared to represent only the effects of the
Acquisition that can be identified and measured, without considering the potential impact of
70
changes in management policies and operational decisions made as a consequence of the
Acquisition.
Further, in view of the difference between the scopes of pro forma and historical financial statements
and the fact that the effects of the Acquisition are calculated differently for purposes of the balance sheet
and the income statement, the two pro forma statements need to be read and examined separately, without
attempting to establish any accounting relationship between them.
71
Pro Forma Consolidated Balance Sheet as of December 31, 2005
December 31,
2005 IFRS—
Lottomatica
ASSETS
A) Non current assets
Property, plant and equipment .
Goodwill . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . .
Other assets . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
158,248
663,613
10,774
1,022
55,009
647,112
280,718
52,509
42,838
77,610
241,990
2,289,307
1,143,601
—
4,725
Total non-current assets . . . . . . . . . . . .
888,666
1,100,787
3,679,623
..
14,436
91,197
22,060
.
.
.
.
.
.
.
.
116,263
31,791
193,178
246,163
164,217
221,010
39,406
151,321
—
—
1,181
(397,484)
Total current assets . . . . . . . . . . . . . . .
601,831
667,151
(374,243)
Total assets . . . . . . . . . . . . . . . . . . . . .
1,490,497
1,767,938
3,305,380
Liabilities and Net shareholders’ equity
Shareholders’ equity . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . . . . .
504,694
7,561
762,888
4,661
627,164
—
(H)
1,894,746
12,222
C) Non current liabilities
Long term debt . . . . . . .
Termination indemnities .
Deferred taxes . . . . . . . .
Long term provision . . . .
.
.
.
.
359,653
7,618
44,233
8,587
458,364
—
125,857
92,505
2,146,127
—
524,350
(3,187)
(I)
2,964,144
7,618
694,440
97,905
Total non current liabilities . . . . . . . . .
420,091
676,726
2,667,290
3,764,107
.
305,006
225,394
—
530,400
.
.
.
7,996
234,129
11,020
15,944
33,325
49,000
5,953
4,973
—
Total current liabilities . . . . . . . . . . . . .
558,151
323,663
10,926
892,740
Total liabilities and shareholders’ equity .
1,490,497
1,767,938
3,305,380
6,563,815
.
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.
.
.
.
.
.
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.
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.
.
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.
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.
.
.
.
.
.
.
.
.
D) Current liabilities
Accounts payable trade and other
payables . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt and
short-term borrowings . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . .
72
(A)
(B)
(C)
December 31, 2005
IFRS Pro Forma
.
.
.
.
.
B) Current assets
Inventory . . . . . . . . . . . . . . . . . . . .
Accounts receivable trade and other
receivables . . . . . . . . . . . . . . . . .
Current financial assets . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . .
.
.
.
.
.
December 31,
2005 IFRS—
Pro Forma
GTECH
Adjustments
Note
(D)
1,047,350
3,233,638
1,206,884
43,860
137,344
5,669,076
(E)
127,693
(F)
(G)
280,480
252,801
233,765
—
894,739
6,563,815
(J)
(K)
(L)
(M)
29,893
272,427
60,020
Other Legal Proceedings
Shareholder Class Action Suits
On January 10, 2006, GTECH and Lottomatica announced that they had entered into the Merger
Agreement. Two shareholder class action lawsuits were subsequently filed against GTECH and its directors
respecting this proposed merger.
On January 12, 2006, a shareholder class action lawsuit captioned Ralph Sellite, individually and on
behalf of all others similar situated, v. GTECH Holdings Corporation, W. Bruce Turner, Robert M. Dewey,
Paget L. Alves, Christine M. Cournoyer, James F. McCann, The Rt. Hon. Sir Jeremy Hanley KCMG, Philip R.
Lochner, Jr., Anthony Ruys and Burnett W. Donoho, was filed in the Rhode Island Superior Court of Kent
County. This lawsuit generally alleges that the consideration to be received by GTECH shareholders in
connection with the merger with Lottomatica is inadequate and that the individual defendants breached
their fiduciary duties to GTECH’s shareholders by approving the merger transaction on the basis of such
allegedly inadequate consideration and under circumstances of certain allegedly disabling conflicts of
interest. The lawsuit further alleges that GTECH aided and abetted the individual defendants in the
breach of their fiduciary duties to GTECH’s shareholders by entering into the Merger Agreement. The
complaint seeks injunctive relief: (i) declaring the Merger Agreement to have been entered into in breach
of the fiduciary duties of the individual defendants, and therefore unlawful and unenforceable;
(ii) enjoining the defendants from proceeding with the Merger Agreement, including consummating the
proposed transaction, unless the defendants implement procedures to obtain the highest possible price for
GTECH; and (iii) directing the individual defendants to obtain a transaction which is in the best interests
of GTECH’s shareholders and to exercise their fiduciary duties to disclose all material information in their
possession respecting the proposed transaction prior to the GTECH shareholder vote on same. The
complaint also seeks to recover costs and disbursements from GTECH and the individual defendants,
including reasonable attorneys’ and experts’ fees.
On March 6, 2006, a second shareholder class action lawsuit, captioned Claire Partners, on behalf of
itself and all others similar situated, v. W. Bruce Turner, Robert M. Dewey, Jr., Paget L. Alves, Christine M.
Cournoyer, Burnett W. Donoho, The Rt. Hon. Sir Jeremy Hanley KCMG, Philip R. Lochner, Jr., James F.
McCann, Anthony Ruys, GTECH Holdings Corporation, and Lottomatica S.p.A., was filed in the Rhode
Island Superior Court of Kent County. This lawsuit generally alleges that each of the individual defendants
breached their fiduciary duties to GTECH’s shareholders by reason of agreeing to consummate the merger
between GTECH and Lottomatica on the basis of allegedly inadequate consideration and under
circumstances of certain allegedly disabling conflicts of interest, and for allegedly failing to fully and fairly
disclose details of the transaction to GTECH’s shareholders. The complaint further alleges that
Lottomatica aided and abetted the individual defendants in such alleged breaches of their fiduciary duties.
The complaint seeks injunctive relief: (i) declaring the defendants to have breached their fiduciary duties
and/or aided and abetted such breaches; (ii) enjoining or rescinding the Merger Agreement; (iii) awarding
plaintiff class compensatory and/or necessary damages as well as allowable interest; (iv) awarding plaintiffs
the cost of disbursements and reasonable attorneys’ and expert’s fees and other costs; and (v) awarding the
plaintiffs such other relief that the court may deem just and equitable.
While GTECH has stated that it believes the claims made in these lawsuits are without merit, in an
effort to eliminate the burden and expense of further litigation and the risk of delaying the closing of the
proposed merger, GTECH has entered into a Memorandum of Understanding with the plaintiffs agreeing
to settle the lawsuits. Pursuant to the Memorandum of Understanding, GTECH has agreed to make
additional disclosures reflected in its proxy statement for the special meeting of its shareholders at which
the Merger will be presented for approval of shareholders, and Lottomatica has agreed to cause to be paid
plaintiffs’ claim for attorneys’ fees and expenses.
196
1.
Description of the pro forma adjustments to the historical consolidated data as of December 31, 2005
and for the year ended December 31, 2005
The following is a description of the effects of the pro forma adjustments of the individual line items in the
consolidated balance sheet.
A. The adjustment represents the effects of the allocation of the excess purchase price to property, plant
and equipment of GTECH for a total of A241,990,000, as described below in the section
‘‘Assumptions—Purchase Price Allocation’’.
B.
The adjustment represents the effects of the allocation of the excess purchase price equity not
allocated to net identifiable assets of GTECH, and recognised as goodwill, for a total of
A2,289,307,000, as described below in the section ‘‘Assumptions—Purchase Price Allocation’’.
C.
The adjustment represents the effects of the allocation of the excess purchase price to intangible
assets acquired of GTECH, for a total of A1,143,601,000, as described below in the section
‘‘Assumptions—Purchase Price Allocation’’.
D. The adjustment represents the recognition, in the amount of A4,725,000 of the non-current portion of
deferred taxes paid on the incidental costs related to the Rights Offering.
E.
The adjustment represents the effects of the allocation of the excess purchase price to inventory of
GTECH, for a total of A22,060,000, as described below in the section ‘‘Assumptions—Purchase Price
Allocation’’.
F.
The adjustment represents the recognition, in the amount of A1,181,000 of the credit for current taxes
on the additional costs estimated in relation to the Rights Offering.
G. The adjustment represents the use of the available cash of Lottomatica and GTECH for a total of
A397,484,000 used for the Acquisition.
H. This includes the effects on the equity of the adjustments relating to: (i) the payment of the increase in
share capital in the amount of A1,400 million, net of the related incidental costs estimated at
A15,854,000, and net of the related deferred tax effect, equal to A5,906,000, (ii) the fees for the early
payment of GTECH indebtedness in the amount of A9,018,000 and the write-off of the residual
amounts relating to the issuance costs of such debt, totaling A4,642,000, (iii) the conversion of the
remaining convertible debentures of GTECH still in existence, for a total of A13,651,000, (iv) the
conversion of all stock options still in existence on the basis of the existing share based plans, for a
total amount of A95,562,000 (corresponding to U.S.$114 million), and (v) the elimination, for the
purposes of consolidation, of the consolidated net equity of GTECH for a total of A858,441,000.
I.
This includes the effects on the long-term portion of long-term debt of the adjustments relating to:
(i) the issue of the Securities in the amount of A750.0 million at an assumed interest rate of 8%, net of
the related additional costs, estimated to be A25,160,000, and (ii) the use of the Term Facilities in the
amount of U.S.$2,260 million (A1,895,655,000) net of incidental costs estimated at A16,004,000, to
finance a portion of the purchase price of GTECH and for the early repayment of GTECH
indebtedness in the amount of A458,364,000.
J.
The adjustment represents the effects of the recognition of deferred tax liabilities deriving from the
allocation of the excess purchase cost paid for the net assets of GTECH for a total of A524,350,000, as
described in the section ‘‘Assumptions—Purchase Price Allocation’’.
K.
The adjustment represents the effects of the elimination of its liabilities of A3,187,000 deriving from
the ‘‘fair value’’ valuation of GTECH indebtedness, as a result of its early repayment.
L.
Includes the effects on the current portion of long-term debt and on short-term borrowings of the
adjustments related to: (i) the early repayment of GTECH indebtedness and the conversion of the
74
remaining shares of the outstanding GTECH Convertible Debentures, for a total of A15,944,000, and
(ii) the use of short term loans for a total of A21,897,000 to cover the remaining portion of the
proposed Acquisition exceeding existing available liquidity and the new financing obtained.
M. The adjustment represents the effects of the differences between the exchange rate on December 31,
2005 and the exchange rate used for the preparation of the pro forma financial information on the
early repayment of GTECH indebtedness, which totals A4,973,000.
The following is a description of the effects of the pro forma adjustments on the individual line items of the
consolidated income statement:
N. The adjustment represents the effect on operating costs of the greater value of the inventory of
GTECH, which during the allocation of the price paid for the Acquisition was valued at market value
of A15,937,000, as described below in the section ‘‘Assumptions—Purchase Price Allocation’’.
O. The adjustment represents the effects of the increased depreciation for a total of A128,511,000 on the
values allocated to fixed assets for capitalised internal work (A46,117,000) and to intangible fixed
assets (A82,394,000) of GTECH, as described below in the section ‘‘Assumptions—Purchase Price
Allocation’’.
P.
Represents the effects of the adjustments relating to: (i) finance expense relating to the Securities and
on the Senior Credit Facilities, which totals approximately A171,844,000, (ii) the depreciation of
additional expense, calculated on a term of 60 years for the Securities and on a term of 6 years for the
Senior Credit Facilities, for a total of A3,086,000, (iii) the elimination of finance expense incurred
during the course of fiscal 2005 on the portion of GTECH’s existing indebtedness to be repaid on the
date of Acquisition, for a total of A21,384,000, net the additional costs to be incurred for the early
repayment equal to A9,018,000, and (iv) the elimination of finance expense incurred during the course
of fiscal 2005 by GTECH for the convertible debentures to be converted on the date of Acquisition,
equal to A1,443,000.
Q. It represents the tax effects of the adjustments illustrated above, for a total of A111,005,000.
2.
Purpose of the presentation of the pro forma consolidated financial data
The purpose of the presentation of the consolidated pro forma data is to retroactively reflect the
significant effects of the proposed Acquisition and the related financing transactions by making
appropriate pro forma adjustments to the historical consolidated financial data. As reported above, the
effects of the proposed Acquisition and the related financing transactions are reflected retroactively in the
balance sheet as if the Acquisition and the related financing transactions had occurred on December 31,
2005 and in the consolidated pro forma statement of income as if they had occurred on January 1, 2005.
3.
Assumptions for the preparation of the pro forma consolidated data
Lottomatica is conducting the proposed Acquisition through a wholly owned Acquisition Subsidiary.
The proposed Acquisition will be financed by equity and debt as listed below.
The Financing Structure of the Transaction
The proposed Acquisition (including the refinancing of GTECH indebtedness) will be financed by:
• the proceeds of the Rights Offering;
• the proceeds of this offering of Securities;
• certain of the proceeds of the Senior Credit Facilities; and
• existing cash of Lottomatica and GTECH.
The Rights Offering is expected to provide for proceeds of approximately A1.4 billion.
75
In connection with the proposed Acquisition, Lottomatica will issue the Securities, to be placed with
institutional investors. The Securities will be listed on the Luxembourg Stock Exchange and will have a
term of 60 years.
In addition, the Acquisition Subsidiary has entered into the Senior Credit Facilities Agreement which
provides for, among other facilities, the Term Facilities. At the time of the Acquisition, GTECH will use a
portion of the Term Facilities in the amount of U.S.$1,710 million (A1,449 million) to finance a portion of
the purchase price of the Acquisition and the remaining U.S.$550 million (A466 million) to finance the
related indebtedness of GTECH. The Senior Credit Facilities are unsecured, and guaranteed by
Lottomatica, Holdings and by several U.S. subsidiaries of GTECH. The repayment of the Senior Credit
Facilities and the payment of interest thereon will be funded through the cash-flow generated by GTECH.
This cash-flow will be generated from available operating proceeds and the receipts from controlled
companies, via both dividends and generated from inter-company loans, or through centralised liquidity
transactions.
The proposed Acquisition
The proposed Acquisition will be effected by means of a cash merger of the Acquisition Subsidiary
with and into GTECH, and holders of GTECH common stock will receive cash consideration of
U.S.$35.00 per share of GTECH common stock. Upon completion of the Merger, which is expected to be
completed by mid-2006, Lottomatica will acquire, through Holdings, all of the approximately 136,133,000
shares of GTECH shares of common stock, for an estimated total purchase price totaling approximately
U.S.$4,765 million, (corresponding to A3,963,152,000) determined as follows:
Assumptions—Purchase Price Allocation
A preliminary assumption for the allocation of the purchase price, based on the preliminary valuation
of the certain designated assets conducted by an independent expert, is set forth below:
in thousands of in thousands of
U.S.$
euro
Purchase price
Portion of the purchase price with a euro-U.S.
dollar coverage contract (average coverage
exchange rate A1.00=U.S.$1.2117), inclusive
of A48,356,000 relating to the coverage
contract . . . . . . . . . . . . . . . . . . . . . . . . . . .
Portion of the purchase price without a euroU.S. dollar coverage contract (rate
A1.00=U.S.$1.1922 on March 13, 2006)(i) . . .
2,483,795
2,098,356
2,280,860
1,913,152
Purchase price . . . . . . . . . . . . . . . . . . . . . . . .
Additional transaction costs . . . . . . . . . . . . . .
4,764,655
*
4,011,508
19,541
Total purchase price . . . . . . . . . . . . . . . . . . . .
Net equity acquired (book value) . . . . . . . . . .
*
*
4,031,049
(858,441)
Excess cost . . . . . . . . . . . . . . . . . . . . . . . . . .
*
3,172,608
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Economy and Finances, in turn, instructs Lottomatica as to the bet collection points to be included in the
network, where the terminals are to be installed.
Ministerial Decree of January 30, 1997 instituted a second weekly drawing (every Wednesday) for the
game of Lotto.
Law No. 449 of December 27, 1997 (i) granted the Ministry of Economy and Finances the power to
provide, with its own decree, the methods for collecting Lotto bets other than those under Article 4,
paragraph 2 of Law No. 528 of August 2, 1982, and (ii) provided for the extension of the bet collection
network to all tobacconists who apply by March 1 of every year, as long as average yearly receipts are
guaranteed, in an amount to be set in agreement with the major national labor organisations in the
respective sectors.
Ministerial Decree of April 14, 1998 transferred to Lottomatica the public powers associated with
collection of the revenues from Lotto, payment of winnings, and declaration of exclusion of bets from the
drawing, effective from May 4, 1998.
Subsequently, with the Ministerial Decree of June 26, 1998, the Ministry of Economy and Finances’
state powers associated with drawing operations for Lotto were transferred to Lottomatica, effective
July 1, 1998.
Ministerial Decree of February 9, 1999 authorised the collection of bets by phone, by means of prepaid forms. This collection operation is performed by Lottomatica, which, for the purpose of the necessary
interconnections, must make its automated system available to all telecommunication operators interested
in that bet collection method (operators of telephony services serving the national territory that
demonstrated their availability, following a public notice to show interest by the company that holds the
concession).
The AAMS Directorial’s Decree of June 7, 2005 provided for the suspension of telephone collection
for the Lotto game over the entire national territory, in consideration of the need to find new regulatory,
technical and administrative methods for remote bet collection.
Director’s Decree of December 30, 1999 provided that, for the purpose of extending the Lotto bet
collection network required by Law 724/94 (as modified by Law 449/97), the appropriate concessions be
granted to all owners of a retailer of monopoly goods who applied for it on March 1, 1998 and March 1,
1999. Granting said concessions is carried out over a period of two years, based on a plan formulated by
the holder of the Lotto concession and approved by the AAMS.
In line with the provisions of Article 4 of the Ministry of Economy and Finances’ Decree of
November 8, 1993 (through which Article 9bis was introduced in the Ministerial Decree of March 17,
1993), in 1998 the Ministry of Economy and Finances determined, upon the completion of a complex
analysis conducted by a ministry-appointed commission (the ‘‘Ministerial Commission’’), the amount that
Lottomatica must pay to the Ministry, based on the savings projected by the Ministry with reference to the
new telecommunication technologies and the modifications introduced into the telecommunication
network by the network used (that is, the B.N.L. Multiservizi primary network and the Telecom Italia
S.p.A. secondary network).
The value of the savings and, as a result, the amount that Lottomatica agreed to pay to the Ministry of
Economy and Finances in the 1999-2003 period was set at Italian Lire 15,852,469,000 (equivalent to
A8,187,116.98), of which Italian Lire 15,295,500,000 (equivalent to A7,899,466.50) was for savings on the
B.N.L. Multiservizi primary network and Italian Lire 556,969,000 (equivalent to A287,650.48) was for
savings on the Telecom Italia S.p.A. secondary network.
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• Directorial Decree of June 15, 2000—Rules governing the telephonic or electronic acceptance of
horse racing bets, in accomplishment of Article 4, paragraph 5 of Decree of the President of the
Republic of Italy No. 169 of April 8, 1998;
• Ministry of Economy and Finances’ Decree No. 231 of July 12, 2000—Regulation containing
amendments and supplements to Ministerial Decree No. 174 of June 2, 1998;
• Law No. 388 of December 23, 2000 (Financial Law for the year 2001)—Article 41;
• Ministry of Economy and Finances’ Decree No. 156 of February 15, 2001—Regulation containing
the authorisation for the telephonic and electronic collection of bets associated with games, bets,
and pool games;
• Ministry of Economy and Finances’ Decree No. 219 of April 26, 2001—Regulations modifying
Decree No. 174 of June 2, 1998;
• Law No. 383 of October 18, 2001. This law provided, among other things, that, in order to optimise
government revenues from the sector, government functions in the matter of organisation and
operation of games, bets, and sweepstakes and the resources associated with them are reorganised
by means of one or more Decrees of the President of the Republic of Italy, to be issued pursuant to
Article 17, paragraph 2 of Law No. 400 of August 23, 1988, based on the following guiding criteria:
(i) elimination of duplication and overlapping of responsibilities, awarding said functions to a joint
structure; (ii) selection of said structure from existing bodies, or a body to be set up pursuant to
Article 8 and 9 of Legislative Decree No. 300 of July 30, 1999. Moreover, Law No. 383 of
October 18, 2001 provided for games, bets, and sweepstakes under paragraph 1 to be governed
taking into account the need to rationalise the existing information systems, by means of one or
more decrees by the Ministry of Economy and Finances, to be issued pursuant to Article 17,
paragraph 3 of Law No. 400 of August 23, 1988. The individual wager to participate in games, bets,
and pool games is set by a decree of the Ministry of Economy and Finances. Technical procedures
for games, bets, and sweepstakes are in any case set by means of a Directorial’s Decree;
• Law Decree No. 452 of December 28, 2001 (contemplated through Law No. 16 of February 24,
2002)—Articles 12 and 13;
• Directorial Decree of May 31, 2002—Rules governing the telephonic or electronic acceptance of
horse racing bets, in accomplishment of Ministerial Decree No. 156 of February 15, 2001;
• Inter-managerial Decree of June 6, 2002—Redefinition of the financial conditions for concessions
to collect bets;
• Inter-managerial Decree of August 2, 2002—Modifications to the Inter-managerial Decree of
June 6, 2002;
• Directorial Decree of November 6, 2002—Implementation of Article 4, paragraphs 5 and 6 of
Decree of the President of the Republic of Italy No. 169 of April 8, 1998. Institution of bets similar
to Tris;
• Law No. 289 of December 27, 2002 (2003 Financial Law)—Article 22, paragraphs 8-17;
• Law Decree No. 45 of March 21, 2003—Urgent provisions regarding UNIRE (Unione Nazionale
per l’Incremento delle Razze Equine/National Union for the Expansion of Equine Breeds) and
horse racing bets;
• Directorial Decree of April 3, 2003—Selection of additional activities that may be managed within
the scope of acceptance of horse racing and sports betting;
• Directorial Decree of April 10, 2003—Issue of authorisation to points of sale for pool games and
any other games associated with sports events;
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• Directorial Decree of October 20, 2005—Technical requirements for ‘‘Big Race—Sci’’ pari-mutuel
betting on skiing competitions;
• Inter-directorial Decree (AAMS—Service Department, Ministry of Agricultural and Forestry
Policies) of October 26, 2005—Extension of operation of Totip pool game;
• Directorial Decree of October 26, 2005—Technical regulations for pari-mutuel horse racing
‘‘Vincente nazionale’’ and ‘‘Accoppiata nazionale’’ betting;
• Directorial Decree of October 28, 2005—Game forms regulations for pari-mutuel horse racing
• Directorial Decree of November 17, 2005—Condition of managing the amounts due by the
concessionaires to AAMS, their allotment in the financial statement of the Administration, method
and timing of the payment to the legitimate holder, performance of accounting obligation of the
concessionaire deriving from the management of the new pari-mutuel horseracing bets;
• Directorial Decree of December 15, 2005—Set up of a new formula for pari-mutuel horse racing
‘‘Nuova Tris Nazionale’’;
• Directorial Decree of December 20, 2005—Regulations of technical requirements of ‘‘Quartè
Nazionale’’;
• Directorial Decree of December 23, 2005—Regulations of technical requirements of the coupons of
‘‘Vincente Nazionale, ‘‘Accoppiata Nazionale’’, ‘‘Nuova Tris Nazionale’’, ‘‘Quartè Nazionale’’ and
‘‘Quintè Nazionale’’;
• Directorial Decree of January 13, 2006—Acceptance of the fixed odd bets on sports and non sports
events of national and international relevance;
• Directorial Decree of January 11, 2006—Unit bets of pari-mutuel bets other than horseracing, set
forth in the Decree of Ministry of Finances No. 278 of August 2, 1999;
• Decree of the Ministry of Economy and Finances No. 110 of January 31, 2006—Regulation
containing amendments to the Decree of Ministry of Economy and Finances No. 179 of June 19,
2003 regulating the general rules for sports-based pool games, in accordance with Article 16 of Law
No. 133 of May 13, 1999;
• Directorial Decree of February 22, 2006—Regulations of technical requirements of ‘‘Big Race
Atletica’’; and
• Decree of Ministry of Economy and Finances No. 111 of March 1, 2006—Regulations concerning
fixed odds bets on sports events other than horseracing and on non sports events to be adopted in
accordance with Article 1, paragraph 286 of Law No. 311 of December 30, 2004.
Agreement for Awards in Concession
By means of a special selection government procedure, in June 2003 the AAMS selected three
concession holders to whom, by virtue of special agreements, were granted the ‘‘activities and functions
associated with pool games as well as other possible games linked with sports events’’. Among said
concession holders, Consorzio Lottomatica Giochi Sportivi—consisting of Lottomatica (85%), Totobit
(5%), Telcos S.p.A. (5%), and Consorzio Totocom/Agenzie On-Line (5%)—came in second, and on
June 5, 2003 it signed a concession agreement with the AAMS.
The activities and functions that are the subject of the Totocalcio concession pertain to pool games
(that is, pool games and sports-based games, as well as pari-mutuel system bets on events other than horse
racing) operating from the beginning of the 2003—2004 soccer season, as well as any other sports-based
game that the AAMS wishes or will wish to sell during the term of the concession through its points of sale
216
(meaning commercial shops with gaming terminals open to the public or betting agencies or Toto receivers
that, subject to an authorisation issued by the AAMS, manage user relations, perform gaming operations
on gaming terminals, and pay off winnings of modest size) and/or through the special sports gaming web
portal created and managed by each selected concession holder. The concession is renewable but it is not
indicated in accordance with which methodology.
More specifically, the activities and functions that are the subject of the totocalcio concession are:
• installation of the Pool Games operating system, with the features defined in the technical
specifications;
• collection of the receipts from the retailers and the transfer to the AAMS of the proceeds due to it,
net of the prizes paid to the winners;
• technological, commercial, and administrative management of the retailers;
• transportation of information from the retailers to the national totalisator and vice versa;
• promotion and management of gaming via the internet and, optionally, by telephonic means; and
• verification of proper and efficient management of the sales of pari-mutuel wagering by the retailers
following issuance of the permit for the sale of pari-mutuel wagering by the AAMS.
Specific Obligations of the Concessionaire
Among the principal obligations to be borne by the concessionaire are the following activities:
• making and running of a proprietary processing system for gaming management, on the basis of the
functional technical specifications in conformity with the provisions set forth in the respective
technical specifications;
• equipping of retail locations with gaming terminals if they are devoid of them;
• transmission to the AAMS of requests for permits for the sale of pari-mutuel wagering put forth by
retailers upon subscription of the appropriate contract between the latter and the concessionaire
itself; in this regard, the concessionaire will be bound to the AAMS until every retailer (located in a
municipality with a population of over 1,500 inhabitants and which is not a Toto collection points)
ensures receipts from the sale of pari-mutuel wagering for every soccer season equal to at least
A10,000.00;
• execution, by its own organisation or by means of a specially identified credit institution, of the
duties of the concessionaire’s cashier for the withdrawal, by direct interbank remittance (RID), of
the sums owed by the retailers;
• having appropriately trained the retailers and those associated with them in the use of the gaming
terminal;
• accounting management, the reporting, and weekly payment of the receipts and the proceeds to the
retailers and to the AAMS;
• payment of the winning tickets, upon validation by the National Totalisator of the receipts
presented for recovery;
• printing of gaming tickets and supplying them to the retailers, with the formats and standards
determined by the AAMS with specific measures;
• regular and special technical maintenance of the gaming terminals and of the connection network,
to guarantee full and continual functionality of the retail locations;
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Leveraging its proven operational track record and reputation, Lottomatica has enlarged its Italian
lotteries portfolio. Since 2003, Lottomatica, through Consorzio Lottomatica Giochi Sportivi, a consortium
90% owned by Lottomatica, has had a non-exclusive concession to collect wagers for the Totocalcio,
Totogol and ‘‘9’’ Sports Pool games. Since 2003, Lottomatica, through Consorzio Lotterie Nazionali, a
consortium 63% owned by Lottomatica, has had an exclusive concession to operate Instant and Traditional
Lotteries in the Republic of Italy. Recently, Lottomatica has diversified in the Republic of Italy into other
national games, such as Other Pari-Mutuel Betting and Gaming Machines.
Lotteries and Gaming
Lotteries
Lottomatica operates both on-line lotteries and games, conducted through computerised systems in
which lottery or gaming terminals are connected to a central computer system. These are generally games
where players select their own numbers, such as Lotto, and off-line lotteries, which are generally games
involving pre-printed paper tickets and are not computerised (except for ticket validation purposes).
Lottomatica operates the following lotteries and games:
• Lotto: Lotto is an on-line lottery in which players bet on the draw of up to five numbers, or
combinations thereof, selected by them.
• Instant and Traditional Lotteries: Instant Lotteries are off-line lotteries consisting of scratch cards
with numbers, letters and/or symbols hidden by a layer of ink which participants scratch off to
discover immediately whether they have won; and Traditional Lotteries are off-line lotteries in
which players purchase tickets, without being able to select their own numbers, with the winning
ticket(s) being drawn at a later date.
• Sports Pools and Other Pari-Mutuel Betting: Sports Pools and Other Pari-Mutuel Betting include
pari-mutuel games in which players bet on the outcome of and number of goals scored in sporting
events, usually soccer matches (e.g., Totocalcio, ‘‘9’’ and Totogol), and other pari-mutuel games in
which players wager on other sports events, horse racing, motor sports, cultural events and current
affairs.
Gaming Machines
Lottomatica provides information technology services for Gaming Machines. Gaming Machines are
electronic machines involving elements of skill or entertainment and risk, and having random winnings
(e.g., amusement with prize or ‘‘AWP’’ machines).
In the coming years, Lottomatica intends to expand the contribution of its Gaming Machines business
through growth in video-lottery terminals, which will be introduced in the Republic of Italy in 2006 and will
also be operated by the nine other concessionaires.
Services
Lottomatica offers the following automated payment and distribution services:
and ticketing for sporting and musical events) and collects payments from end users for which it
retains a fee, which may be a fixed per transaction amount or a percentage of the value of the
services.
81
• Payment Services: Lottomatica collects payments from consumers for both private sector
enterprises (i.e., the payment of certain utility bills) and public sector entities (i.e., fines, local taxes
and television license fees) for which it receives a fixed fee per transaction.
• Processing Services: Lottomatica provides transaction processing services and technology to third
parties (i.e., car road taxes, third party electronic top-up transactions for pre-paid mobile
telephones, some minor taxes and loyalty programs, and stamp duties printing) for which it receives
a fee, which may be a fixed amount per transaction or a percentage of the value of the services.
In addition, Lottomatica expects to launch stored value services, which consist of issuing and acquiring
services related to pre-paid debit cards, for which necessary authorisation has been received from Bank of
Italy.
Key Business Trends
Lotto
In playing Lotto, wagers can be broken down into two different types: core bets, which indicate all bets
which remain structurally stable over time and allow Lottomatica to achieve significant economic results;
and late numbers, which indicate bets made on numbers that have not been drawn for more than 100
drawings, where some players concentrate an additional amount of bets, with unit values considerably
higher than average (‘‘speculative’’ bets). Players often bet considerably higher amounts on late numbers
compared with the average bet amount. In addition, players often include the late number which is the
subject of their speculative bet in a core bet as part of a combination of numbers, which tends to lead to an
increase in the average amount of each wager and the total numbers of bets placed. Although the amounts
placed on speculative bets have a correlative effect on the amounts placed on core bets, core bets tend to
be more stable year on year.
Total wagers on Lotto in 2005 were approximately A7.3 billion, a 37.6% decrease from the unusually
high level of wagers of approximately A11.7 billion in 2004. This unusually high level in 2004 was the
highest total amount of annual wagers since Lottomatica began operating and was attributable to an
increase in speculative bets on certain late numbers, in particular number 53 drawn on the Venice draw
wheel in early 2005, following which, the amounts placed on speculative bets returned to historic levels.
Amounts placed on speculative bets in 2005 were approximately A1.6 billion compared with approximately
A5.6 billion in 2004, a 71.4% decrease. This reduction in speculative bets had a limited effect on amounts
placed on core bets which remained more stable. The total number of bets placed also decreased in 2005 to
2.6 billion from 3.0 billion in 2004, a decrease of 10.3%.
Despite the unusually high level of wagers in 2004 and the subsequent return to historic levels in 2005
following the drawing of certain late numbers, in particular number 53 on the Venice draw wheel, the
effect on Lottomatica’s revenues generated from Lotto was less volatile. Revenues in 2005 were
A432.3 million compared with A494.2 million in 2004, a 12.5% reduction, considerably less than the 37.6%
decrease in total wagers. This is because the fee rate payable to Lottomatica for operating Lotto is based
on a scale that decreases as wagers increase. See ‘‘Business—Lottomatica—Lotteries—Lotto—The Fee’’.
The fee received by Lottomatica is approximately 6.5% of the total annual wager amount up to
A714 million while the rate applied to incremental wagers above A714 million gradually decreases as the
total annual wager amount increases. This fee rate mechanism has a stabilising effect on revenues
generated by operating Lotto.
Instant and Traditional Lotteries
In October 2003, the Ministry of Economy and Finances granted to Consorzio Lotterie Nazionali, a
consortium 63% owned by Lottomatica, the exclusive concession in the Republic of Italy to operate Instant
and Traditional Lotteries, which prior to that time had been operated by the AAMS. For the purposes of
82
its financial results, Lottomatica is required to consolidate the results of Consorzio Lotterie Nazionali on a
line-by-line basis. Consorzio Lotterie Nazionali began operating the instant lottery business in June 2004
and the Traditional Lotteries business in March 2004.
Accordingly, revenues in 2005 increased 247.3% to A54.9 million compared with A15.8 million in 2004.
Consorzio Lotterie Nazionali sold approximately 810 million tickets in 2005, approximately 793 million of
which were Instant Lotteries ticket sales and approximately 16.2 million of which were Traditional
Lotteries ticket sales, generating wagers of A1.5 billion, of which A48.5 million were Traditional Lotteries
wagers, a decrease from the previous year. This compared to approximately 345 million tickets sold in the
prior year, approximately 325 million of which were instant lottery ticket sales and approximately
20 million of which were Traditional Lotteries ticket sales, generating wagers of A0.5 billion, of which
A60.0 million being Traditional Lotteries wagers.
Consorzio Lotterie Nazionali’s strategy since it began operating this business has been to progressively
increase the average ticket price of instant lottery games while also increasing the number of tickets sold.
This strategy has been implemented by introducing a number of new instant lottery games to the portfolio
both to replace existing games at the same price point and to complement and add to the existing range of
games in the portfolio at different price points. Consorzio Lotterie Nazionali added A3 games, beginning
with ‘‘Stella Stellina’’ at the end of 2004, to the A1 and A2 games launched at the commencement of the
operation of the Instant and Traditional Lotteries business. In addition, during 2005, Consorzio Lotterie
Nazionali released ‘‘Tutti Frutti’’ and ‘‘Fai Scopa!’’ each of which is a A2 game, ‘‘Las Vegas’’ and ‘‘Super
Poker’’, each of which is a A3 game, and ‘‘Miliardario’’ which is a A5 game. The ‘‘Tutti Frutti’’ game is no
longer available to players. Sales of the A1, A2 and A3 games gradually increased during the course of 2005,
but sales of ‘‘Miliardario’’ were in excess of management’s expectations, contributing significantly to the
increase in wagers in 2005. As a result of the implementation of this strategy, the weighted average ticket
price of instant lottery games increased to A1.88 in 2005 from A1.47 in 2004.
In addition, Consorzio Lotterie Nazionali introduced a new A1 game in April 2006, ‘‘Portafortuna’’
and has developed a new A2 game, ‘‘Tuffati nell’oro’’, which Consorzio Lotterie Nazionali expects to launch
later in 2006.
Expansion of the distribution network for lottery games continued, with the launch of sales in the bar
and newsstand channel, in addition to growth of the tobacconists channel. Consorzio Lotterie Nazionali
has a total of approximately 31,000 points of sale as of the date of this Offering Circular.
Gaming Machines
Revenues generated by Gaming Machines in 2005 were A6.4 million compared with A0.6 million in
2004.
Currently, Italian law permits the operation of devices that involve elements of skill or entertainment
together with a factor of risk (which must be activated by inserting a coin). The cost of the game cannot
currently exceed A0.50, with winnings capped at A50. Winnings are distributed in cash in coins only, and the
minimum duration of the game must be seven seconds. The device must calculate winnings in a random
manner on an overall cycle of no more than 14,000 games and winnings must not be less than 75% of the
amounts wagered over that cycle.
Pursuant to new laws issued in 2006, once the Ministry of Economy and Finances issues the requisite
decree, the maximum cost of the game will be increased to A1, with winnings capped at A100. At that time,
the cycle over which the winnings payout of 75% of amounts wagered is calculated will be increased to
140,000 and the minimum duration of the game will be reduced to four seconds. In addition to coins, the
machines may also be activated by specific electronic payment devices such as pre-paid debit cards and
credit cards. These new laws also introduced a new kind of Gaming Machine: video lottery terminals that
are connected to a telecommunications network and activated exclusively when connected to the network’s
83
processing system. These new video lottery terminals will enable the introduction of new games remotely
without having to modify the actual Gaming Machine, as is the case with the current generation of AWP
machines.
As of March 31, 2006, RTI Videolot S.p.A. (‘‘RTI Videolot’’), a subsidiary of Lottomatica, held
authorisations for installing 12,000 Gaming Machines, 8,500 of which were already in use for AWP
machines installed in commercial businesses.
In the Gaming Machine business Lottomatica acts as concessionaire providing technological
infrastructure, and is responsible for linking all of the Gaming Machines for which RTI Videolot has
authorisations, ensuring compliance with the regulations regarding game content, win frequency and
payout, administrative services and collecting and remitting accrued taxes to the Ministry of Economy and
Finances. Lottomatica plans to use RTI Videolot’s remaining 3,500 authorisations primarily for video
lottery terminals.
Lottomatica, through its subsidiary Videolot Gestione S.p.A. (‘‘Videolot Gestione’’), also owns a small
number of Gaming Machines, the authorisations for which are included in the 8,500 authorisations already
in use as of March 31, 2006. Lottomatica wished to cease being an owner of Gaming Machines in addition
to being the concessionaire providing technological infrastructure and Videolot Gestione began, during
2005, to dispose of the ownership of these machines, with RTI Videolot continuing to retain the relevant
authorisations. Lottomatica expects to dispose of the remaining machines by the end of 2006 while
continuing to retain the relevant authorisations.
Services
Lottomatica’s Services business generated revenues in 2005 of A63.9 million, an increase of
approximately 32.7% compared to revenues of A38.2 million in 2004.
Lottomatica’s Services business is divided into Commercial Services, Payment Services and Processing
Services. In addition, Lottomatica expects to launch stored value services, which consists of issuing and
Commercial Services
For the year ended December 31, 2005, Lottomatica generated revenues of approximately
A41.1 million from commercial services, an increase of 24.5% compared to revenues of A33.0 million in
2004. The business that has driven this growth and has been the primary factor in the growth of
Lottomatica’s Services business has been the sale of electronic top-up services for pre-paid mobile and
fixed-line telephone accounts.
Electronic Top-up Services. For the year ended December 31, 2005, top-ups were sold through more
than 32,000 Lottomatica and Totobit points of sale, generating revenues of approximately A35.8 million in
2005, an increase of 26.2% compared to revenues of A28.4 million for 2004. Lottomatica expects these
services to continue to grow in the future and be a significant contributor to Lottomatica’s Services
business, primarily because of the continuing trend towards top-up services provided electronically to the
detriment of the scratch card market.
Ticketing Services. Since 1998, Lottomatica, through its subsidiary Lottomatica Italia Servizi S.p.A.
(‘‘LIS’’), has offered an automated ticketing service for the purchase of tickets and seasonal subscriptions
for sports events and cultural and musical events. Approximately 4.1 million tickets were sold through this
service during 2005. Revenues from ticketing services for 2005 were A5.3 million compared with
A4.6 million for 2004, an increase of approximately 14.1%. This increase was primarily due to an expansion
of the distribution channels, for example through Lottomatica’s website, and an increase in the number of
events for which ticketing services are provided.
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Payment and Collection Services
Lottomatica collects payment from consumers for both private sector enterprises (i.e., the payment of
utility bills) and public sector entities (i.e., fines, local taxes, television license fees and duties). For the year
ended December 31, 2005, Lottomatica’s revenues generated from payment services remained stable at
A1.4 million compared with 2004.
Italian citizens are allowed to pay local fines and various taxes, court fees and television license fees
electronically at certain outlets, such as Lottomatica’s network of tobacconists, in addition to post offices
and banks.
Processing Services
For the year ended December 31, 2005, Lottomatica generated approximately A15.4 million in
revenues from processing services, compared with A10.5 million in 2004, an increase of approximately
47.0%. This increase is primarily due to the commencement of processing stamp duty in 2005 and an
increase in the transactions processed for third parties using Lottomatica’s technology.
Seasonality
While no significant seasonality exists for Lotto, Instant Lotteries or Gaming Machines, seasonality
does affect the following games and services to the extent discussed below:
• Sports Pools: the collection for Totocalcio occurs mostly during the soccer season, which is from
September to June;
• Traditional Lotteries: the distribution and sale of tickets is particularly concentrated in the period
of the Lotteria Italia annual draw, which is from September to January;
• Processing Services: normally, processing for car road tax experiences peaks corresponding with
the four deadlines during the year scheduled by Italian regulations; and
• Ticketing Services: the sale of tickets for sports events coincides with the duration of the national
soccer championship, while the sale of seasonal subscriptions is concentrated only in the summer
months, prior to the beginning of the soccer season.
Regulation and Legal Matters
Lottomatica’s business is highly regulated, and the competition to secure new government contracts is
often intense. Lottomatica is party to a number of proceedings seeking damages or penalties, or alleging
improprieties on the part of Lottomatica. Allegations or findings of improper conduct on Lottomatica’s
part or attributable to it in any manner could have a material adverse effect on its business, including
Lottomatica’s ability to retain existing contracts or to obtain new or renewal contracts. In addition,
continuing adverse publicity resulting from government proceedings and related matters could have a
material adverse effect on Lottomatica’s reputation and business. See the following sections of this
Offering Circular for further information concerning these matters and other contingencies:
• ‘‘Risk Factors—The gaming and betting industry is highly regulated’’;
• ‘‘Business—Lottomatica—Legal Proceedings’’; and
• ‘‘Judicial Proceedings as at December 31, 2005’’ in Lottomatica’s audited consolidated financial
statements for 2005 included elsewhere in this Offering Circular.
85
paragraph 498 of Law No. 311 of December 30, 2004) ensuring that each concessionaire exclusively
markets payment instruments pertaining to the games operated by them; such activity is assessed at
a fee equal to 6% of the value of the payment instruments sold.
Furthermore, for years 2006 - 2008, the fee mechanism for Lotto, Enalotto, Totip pool games, sports
pool and pari-mutuel betting (Decree of the Ministry of Economy and Finances No. 278 of August 2, 1999)
Tris bet and the new horse racing bets operated in the new interactive channels as provided for by
Article 1, paragraph 498, of Law No. 311 of December 30, 2004, have been introduced on a trial basis. The
fee mechanism correlates to the collection level of the preceding year, based upon the following criteria:
• in the event that during 2006 the collection of the above-listed games distributed by retailers
through interactive channels is higher than A11.2 million, the fee for 2007 will be equal to 9% of the
collection; and
through interactive channels is higher than A11.6 million, the fee provided for in the prior bullet
point is confirmed for 2008 and subsequent years.
Furthermore, it provides that the Ministry of Economy and Finances/AAMS, with Directorial Decree
that must be issued within sixty days of enacting conversion Law No. 248, of December 2, 2005, establishes
regulations for the introduction of new games relating to Lotto and Superenalotto without changes in the
fee percentage, based upon the following principles:
• the amount wagered for every combination shall be equal to A0.50;
• the player’s return shall not be less than 50 percent of the total amount wagered;
• each new game must differ from those currently provided for Lotto and Superenalotto games;
• the introduction of instant prizes, which are cumulative with other point prizes; and
• the possibility to access the game remotely.
Finally, the same Decree establishes that, according to the provisions of Article 1, paragraphs 290-291,
of Law No. 311 of December 30, 2004, the Ministry of Economy and Finances/AAMS shall determine its
own provisions, the means for regulating the remote collection of bets, Bingo and lotteries using internet,
digital, cable and satellite television, as well as with fixed and mobile telephones within January 31, 2006.
In particular, new laws contemplate that the concessionaires for lotteries, sports pools and pari-mutuel
betting with collection systems in compliance with the technical and organisational requirements specified
by AAMS will be permitted to collect wagers in the new interactive channels, as provided for by Article 1,
paragraph 2 of Law No. 311 of December 30, 2004. A fee equal to 8 percent of the total amount collected
is allowed for such activities.
Law No. 266 of December 23, 2005, Article 1, paragraphs 535-537, establishes that, upholding the
powers of the judicially authority in the event that an action constitutes a crime, the Ministry of Economy
and Finances/AAMS shall communicate to the connectivity suppliers is the internet network or the
managers of other remote or telecommunication networks or to other related remote and
telecommunication service operators, situations of gaming, betting and pool game offers, using the abovementioned networks, having monetary winnings that lack franchises, authorisations, licenses or other
authorized qualifications, all of which are in violation of the rules and regulations of the law or of the limits
or regulations defined by the same Administration.
Those receiving the communications must inhibit the use of the networks, for which they are
operators or for which they supply services, for the development of games, bets or pool games, by adopting
the appropriate technical measures conforming to those established by one or more provisions of the
Ministry of Economy and Finances/AAMS.
In the case of violation to inhibit the use of the networks, a monetary fine ranging from A30,000 to
A180,000 shall be levied for each violation. The competent authority is the AAMS.
233
Accrued Liabilities
Management exercises considerable judgment in recording accrued liabilities and exposure to
contingent liabilities related to pending litigation or other outstanding claims subject to negotiated
settlement, mediation, arbitration or government regulation as well as other contingent liabilities.
Judgment is necessary in assessing the likelihood that a pending claim will succeed or a liability will arise
and to quantify the possible range of the final settlement. In case the occurrence of a contingency or
potential liability is more likely than not, management accrues an amount for contingent liabilities that
represents management’s estimate at that date. Because of the inherent uncertainties in the foregoing
evaluation process, actual losses may be different from the original estimated amount accrued. The
necessary estimates used by management rely on the analysis of internal specialists, attorneys, actuaries or
other external specialists as considered necessary. A revision of the original estimates may significantly
affect future operating results.
Deferred Taxes
Management is required to estimate income taxes. This process involves an estimation of actual
current tax exposure and the assessment of the temporary differences resulting from differing treatment of
items such as accruals and amortisation, among others, for tax and financial reporting purposes. These
differences result in deferred tax assets and liabilities, which are included within Lottomatica’s
consolidated balance sheet. In the course of the tax planning process management must assess the ability
of Lottomatica and its subsidiaries to obtain the benefit of deferred tax assets based on expected future
taxable income and available tax planning strategies. If, in management’s judgment, the deferred tax assets
recorded will not be recovered, a valuation allowance is recorded to reduce the deferred tax asset.
Significant management judgment is required in determining the provision for income taxes, deferred tax
assets, deferred tax liabilities and valuation allowances to reflect the potential inability to recover deferred
tax assets in full. The recoverability of tax assets based on the criteria of recoverability has historically been
just over 50%. Assessment of the appropriate amount and classification of income taxes is dependent on
several factors, including estimates of the timing and realisation of deferred income tax assets and the
timing of income tax payments. Actual collections and payments may differ materially from these estimates
as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax
balances.
Allowance for Doubtful Accounts
Management maintains an allowance for doubtful accounts to account for estimated losses resulting
from the inability of customers to make required payments. When evaluating the adequacy of the
allowance for doubtful accounts, management bases its estimates on the aging of Lottomatica’s accounts
receivable balances and Lottomatica’s historical write-off experience with similar receivables, customer
creditworthiness and changes in Lottomatica’s customer payment terms. If the financial condition of
customers were to deteriorate, the actual write-offs might be higher than expected.
ITALIAN GAAP
The preparation of the consolidated financial statements of Lottomatica in 2003 and 2004 in
accordance with Italian GAAP requires the application of accounting policies that often involve a
significant degree of estimates and judgment by management. Such estimates and judgment affect the
recorded amounts of assets, liabilities, costs and revenues and the disclosure of contingent assets and
liabilities. Management reviews estimates and assumptions on an ongoing basis based on historical
experience and other factors considered reasonable in the circumstances. Actual results could differ
significantly from the estimates, based on the different assumptions or the different operating conditions.
The areas described below are deemed to be critical for the application of accounting principles to
87
determine the consolidated financial condition and operating results of Lottomatica in 2003 and 2004 in
accordance with Italian GAAP.
Property and Equipment and Intangible Assets—Estimated Useful Life and Recoverability
Property, plant and equipment and intangible assets, including goodwill, are recorded at their
acquisition or revalued cost. Property, plant and equipment and intangible assets are depreciated or
amortised on a straight-line basis over their estimated useful lives. The useful lives of long-lived assets are
subject to several factors, such as technological feasibility, obsolescence, changes in consumer demand and
strategic management decisions. Property, plant and equipment and intangible assets, including goodwill
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to
be recognised is measured by the amount by which the carrying amounts of such assets exceed the fair
value of the assets. Considerable judgment is required to estimate the fair value of the impaired asset.
Accrued Liabilities
Management exercises considerable judgment in recording accrued liabilities and exposure to
contingent liabilities related to pending litigation or other outstanding claims subject to negotiated
settlement, mediation, arbitration or government regulation as well as other contingent liabilities.
Judgment is necessary in assessing the likelihood that a pending claim will succeed or a liability will arise
and to quantify the possible range of the final settlement. In case the occurrence of a contingency or
potential liability is more likely than not, management accrues an amount for contingent liabilities that
represents management’s estimate at that date. Because of the inherent uncertainties in the foregoing
evaluation process, actual losses may be different from the original estimated amount accrued. The
necessary estimates used by management rely on the analysis of internal specialists, attorneys, actuaries or
other external specialists as considered necessary. A revision of the original estimates may significantly
affect future operating results.
Deferred Taxes
Management is required to estimate income taxes. This process involves an estimation of actual
current tax exposure and the assessment of the temporary differences resulting from differing treatment of
financial statement line items. These differences result in deferred tax assets and liabilities, which are
reported in the consolidated balance sheet. Management must assess the recoverability of the deferred tax
assets and, if not reasonably certain, a valuation allowance is recorded to reduce the amount of the
deferred tax asset. Significant management judgment is required in determining the provision for income
taxes, deferred tax assets, deferred tax liabilities and valuation allowances to reflect the potential inability
to fully recover deferred tax assets. Actual collections and payments may materially differ from these
estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related
income tax balances.
Allowance for Doubtful Accounts
Management maintains an allowance for doubtful accounts to account for estimated losses resulting
from the inability of customers to make required payments. Management bases its estimates on the aging
of the accounts receivable balances and the historical write-off experience with similar receivables,
customer creditworthiness and changes in the customers’ payment terms when evaluating the adequacy of
the allowance for doubtful accounts. If the financial condition of customers were to deteriorate, the actual
write-offs might be higher than expected.
88
Transition to IFRS
Under European Union Regulation No. 1606 of July 2002, all EU companies with securities listed on
a regulated market in the European Union have been required to prepare their consolidated financial
statements in accordance with IFRS, beginning with their 2005 financial year. Comparative information for
the 2004 financial year must be presented at that time.
Up to December 31, 2004, Lottomatica prepared its audited consolidated financial statements and
unaudited interim consolidated financial statements on the basis of Italian GAAP. Beginning in 2005,
Lottomatica has prepared its financial statements according to IFRS. The audited consolidated financial
statements as of and for the year ended December 31, 2004 prepared in accordance with Italian GAAP
have been reconciled to IFRS for purposes of comparison with 2005. See ‘‘Risk Factors—Risk Factors
Relating to Lottomatica—Lottomatica’s accounts prepared in accordance with IFRS may not be
comparable with its previous audited financial statements prepared in accordance with Italian GAAP’’ and
‘‘Appendix E—Lottomatica—Summary of Certain Significant Differences Among Italian GAAP, IFRS and
U.S. GAAP’’.
The effects of the transition to IFRS arise from the changes to accounting standards. As required by
IFRS 1, these effects are reflected in initial shareholders’ equity at the date of transition (which for the
reconciliation statement prepared under IFRS is January 1, 2004, although this is not the case for the 2004
financial statements prepared under Italian GAAP). Transition to IFRS has meant that estimates
previously made according to Italian GAAP have been maintained, except in those cases where the
adoption of IFRS accounting standards has required estimates to be made using different methods.
Changes in the Scope of Consolidation (IAS 27). Under Italian GAAP, Lotto do Brasil, Lottomatica
Argentina and LIS Finanziaria S.p.A. (‘‘LIS Finanziaria’’) were not included in Lottomatica’s consolidated
financial reports, as Lotto do Brasil and Lottomatica Argentina were not considered significant, and LIS
Finanziaria was determined to be involved in different business activities. In accordance with IAS 27,
Lottomatica determined that each of these entities should be included in its consolidated financial reports.
Goodwill (IAS 36). Under Italian GAAP, goodwill relating to the Lotto concession was subject to
amortisation over the period until 2012. Goodwill amortisation under Italian GAAP was A54.0 million for
2004. In accordance with IAS 36, goodwill is not subject to amortisation but must be subject to an annual
impairment test to determine whether any loss in value has occurred. The most significant items in the
determination under IAS 36 for Lottomatica are:
• goodwill associated with the merger of Lottomatica S.p.A. into Tyche S.p.A., a subsidiary of
De Agostini in December 2002;
• goodwill on the contribution of PCC Giochi e Servizi S.p.A. (‘‘PCC GS S.p.A.’’);
• goodwill associated with the acquisition of the games division of EIS S.p.A. and the liquidation of
Twin S.p.A.;
• goodwill associated with the merger of Medialan S.p.A. into Totobit Informatica Software e Sistemi
S.p.A.; and
• goodwill from the acquisition of Totobit Informatica Software e Sistemi S.p.A. by Lottomatica in
August 2003.
As of December 31, 2004, under Italian GAAP, the value of goodwill recorded on Lottomatica’s balance
sheet was A392.4 million. Under IFRS, the value of goodwill recorded on Lottomatica’s balance sheet as of
December 31, 2004 was A446.6 million. As of December 31, 2005, under IFRS, the value of goodwill
recorded on Lottomatica’s balance sheet was A663.6 million.
89
Paolo Guglielmo Luigi Ainio is a member of Lottomatica’s Board of Directors. He serves as General
Director of Mediapolis, formerly known as Media and Communication Services, which merged with Aino
Media, a company he founded in 1988. He founded Matrix Company in 1995 and served as its Managing
Director until 2002. Commencing in 1994, he serves as Managing Director of CIA Medianetwork. He has
also served as a General Director of Centro Media.
Marco Boroli is a member of Lottomatica’s Board of Directors. In 1975 he became a manager of
Lottomatica and in 1978 he was named General Vice Director. In 1983 he became the General Director
with the responsibility for the management of the book sector. In 1986 he was named Delegate Director
and in 1990 Vice President. He became the President of the De Agostini Geographical Institute in
May 1996. Dr. Marco Boroli assumed the role of deputy Vice President of the parent company holding De
Agostini S.p.A. in March 1999 and he is a member of the executive committee of De Agostini S.p.A.
Within the Group he is also the President of De Agostini Book Marketing, board member and member of
the executive committee of Lottomatica S.p.A. and De Agostini Editore S.p.A., and board member of Toro
Assicurazioni S.p.A. He holds a degree in Political Science.
Marco Drago is a member of Lottomatica’s Board of Directors. He is the President of De Agostini, the
De Agostini Group Holding Company, and a member of the Board of Directors of a number of De
Agostini Group companies. He is currently also President and a member of the De Agostini Executive
Committee, Director and member of the Executive Committee of De Agostini Editore S.p.A.,
Administrator and member of the Executive Committee of Toro Assicurazioni S.p.A., Administrator of De
Agostini International BV and of Editions Atlas (France) S.a.S., Vice President of Grupo Planeta De
Agostini S.L., Director of Antena 3 de Television S.A. (Spain), Techosp S.p.A., and Vice President of De
Agostini Communications S.A. He has been with the De Agostini Group since 1969 and has held a number
of positions with the De Agostini Group. He holds a degree in Business and Economics.
Roberto Drago is a member of Lottomatica’s Board of Directors. He is Vice President and member of the
Executive Committee of De Agostini, President of DEA Factor S.p.A., Vice President of De Agostini
Invest S.A., Director of De Agostini Editore, Grupo Planeta De Agostini S.L. and Finanziaria Canova
S.p.A., Director and member of the Executive Committee of Toro Assicurazioni S.p.A., and the Director of
Banche Popolari Unite S.p.A. and BPU Banca International S.A. He has been with the De Agostini Group
since 1976 and has held a number of positions within the group, including Vice President of the Finance
Division of De Agostini S.p.A., Executive Vice President, General Director of Finanziaria De Agostini,
which handles the Group’s shareholder, legal, fiscal, and financial services, and director of foreign
procedures and shareholder relations at the Istituto Geografico De Agostini S.p.A. He holds a degree in
Business and Economics.
Pier Luigi Celli is a member of Lottomatica’s Board of Directors. He became General Director of RAI
in 1998 and remained in this position until 2001, when he became Executive President of IPSE 2000. From
1983 to 1988 he was the Director of Human Resources and Organisation for RAI, then the Olivetti Group,
and finally ENEL. He began his career as the Director of the Research Department at the Bolzano
Department of Industry and was in charge of five Professional Training Centers. In 1982 he became
Manager of Executive Training and Organisation for ENI, of which he later become Vice Director of
Human Resources and Organisation. He holds a degree in Sociology with honors.
Antonio Tazartes is a member of Lottomatica’s Board of Directors. He has been with Investitori
Associati S.p.A. of Milan since 1993. From 1989 until 1993 he served as the Managing Director of
Bain & Co. Prior to that time, he worked at Laboratoires Gani in Paris and as a part-time Junior Associate
at the Law Offices of Erede Bianchi Gilberti in Milan. He holds a Master’s Degree in Business
Administration, with specialisation in Marketing and Finance, and a Master’s Degree in Law from New
York University.
Emanuela Chiti has been Director of Auditing, Quality and Security of Lottomatica since 1997. From
1980 to 1997 she was employed by Sogei, most recently as a project manager.
241
Operations Review
Lottomatica derives its revenues primarily from Lotteries, comprising Lotto, Instant and Traditional
Lotteries, Sports Pools and Other Pari-Mutuel Betting; Gaming Machines; and Services, comprising
commercial services, payment and collection services and processing services. Substantially all of
Lottomatica’s revenues are derived from operations in the Republic of Italy.
Results of Operations
Comparison of 2005 with 2004
Lottomatica’s discussion of 2005 as compared to 2004 is provided on the basis of IFRS.
Total Revenues
Revenues.
and 2004:
The table below shows Lottomatica’s revenues for the years ended December 31, 2005
Total Revenues
Lotteries:
Lotto . . . . . . . . . . . . . . . . . . . .
Sports Pools . . . . . . . . . . . . . . .
Betting services . . . . . . . . . . . .
Tris . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2005
Year Ended December 31, 2004
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
432,288
54,901
5,947
2,258
1,266
74.2%
9.4%
1.0%
0.4%
0.2%
494,210
15,808
4,015
2,150
3,128
84.4%
2.7%
0.7%
0.4%
0.5%
Total Lotteries . . . . . . . . . . . . . . . . . . .
Gaming Machines:
AWPs . . . . . . . . . . . . . . . . . . . . . . . . .
496,660
85.2%
519,311
88.6%
6,398
1.1%
582
0.1%
Total Gaming Machines . . . . . . . . . . . .
6,398
1.1%
582
0.1%
..
503,058
86.3%
519,893
88.7%
..
..
35,832
5,261
6.1%
0.9%
28,384
4,612
4.8%
0.8%
..
..
7,628
7,823
1.3%
1.3%
7,788
2,721
1.3%
0.5%
.
.
.
.
.
.
.
.
223
586
606
5,985
0.0%
0.1%
0.1%
0.0%
286
492
584
3,324
0.0%
0.1%
0.1%
0.6%
Total Services . . . . . . . . . . . . . . . . . . . .
63,944
11.0%
48,191
8.2%
PCC GS S.p.A. . . . . . . . . . . . . . . . . . . . .
Other Revenues . . . . . . . . . . . . . . . . . . . .
Total Revenues . . . . . . . . . . . . . . . . . . . . .
2,152
13,520
582,674
0.4%
2.3%
100.0%
1,726
15,964
585,774
0.3%
2.7%
100.0%
Total Lotteries and Gaming . . . . . . . .
Services
Commercial Services:
Top-ups—(LIS and Totobit networks) .
Sport ticket office services . . . . . . . . .
Processing Services:
Car road tax . . . . . . . . . . . . . . . . . . .
Totobit system . . . . . . . . . . . . . . . . .
Payment and Collection Services:
Municipal services . . . . . . . . . . . . . .
Unified state taxes . . . . . . . . . . . . . .
RAI television license . . . . . . . . . . . .
Other services . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
Total revenues were A582.7 million in 2005, compared with A585.8 million in 2004, a decrease of
A3.1 million. This decrease was primarily due to a decrease in revenues from Lotto of approximately
91
A61.9 million or 12.5%. This decrease was partially offset by an increase in revenues from Instant and
Traditional Lotteries of A39.1 million or 247.3%, an increase in revenues for services, primarily from
electronic top-ups services for pre-paid mobile and fixed-line telephone accounts of A7.4 million or 26.4%
and an increase in revenues from Gaming Machines of A5.8 million.
Revenues generated by Lotteries in 2005 were A496.7 million compared with A519.3 million in 2004, a
decrease of 4.4%. This was primarily due to a decrease in revenues from Lotto from the unusually high
level achieved in 2004, partially offset by an increase in revenues generated by Instant and Traditional
Lotteries. The 12.5% decrease in revenues from Lotto reflects the effects of a 37.6% decrease in overall
wagers, to approximately A7.3 billion in 2005 from approximately A11.7 billion in 2004. The effects of this
decrease in wagers on Lottomatica’s revenues are mitigated by the fact that the fee rate payable to
Lottomatica for operating Lotto is based on a scale that decreases as total wager amounts increase. The
fee rate applied to total wagers up to A714 million is approximately 6.5%, while the rate applied to
incremental wagers above A714 million gradually decreases as the total annual wager amount increases.
Lottomatica believes that the decrease in overall wagers from the unusually high levels in 2004 is primarily
the result of a reduction in speculative bets made on ‘‘late numbers’’ (those numbers that have not been
drawn for more than 100 drawings), from approximately A5.6 billion in 2004 to approximately A1.6 billion
in 2005 as a result of certain late numbers, in particular number 53 drawn on the Venice draw wheel in
early 2005. This reduction in wagers reflected:
• a decrease in the size of the average wager from A3.9 in 2004 to A2.8 in 2005, and
• a decrease in the overall number of bets from 3.0 billion in 2004 to 2.6 billion in 2005,
The 247.3% increase in revenues from Instant and Traditional Lotteries to A54.9 million in 2005 from
A15.8 million in 2004, the year in which Consorzio Lotterie Nazionali began operating this business, was
primarily due to the increase in the number of tickets sold in 2005 and the increase of the total wagers
during the period, taking into account the fact that 2005 was the first full year of the operation of Instant
and Traditional Lotteries. In addition, these increases reflected the implementation of the strategy to
progressively increase the average price of new games, in particular the introduction of the new A5
‘‘Miliardario’’ game.
The increase in revenues from Gaming Machines to A6.4 million in 2005 from A0.6 million in 2004
reflects the fact that this business commenced during the last months of 2004. In addition, during 2005
Lottomatica also saw the number of machines to which Lottomatica provided information technology
services increase from approximately 7,700 to approximately 8,500 as at December 31, 2005.
Revenues generated by Lottomatica’s Services business in 2005 were A63.9 million compared with
A48.2 million in 2004, an increase of A15.7 million or 32.7%, which was primarily due to an increase in the
revenues generated by commercial services and in processing services.
Revenues generated by commercial services in 2005 were A41.1 million compared with A33.0 million in
2004, an increase of A8.1 million or 24.5%. This increase was primarily due to an increase in revenues from
the sale of electronic top-up services for pre-paid mobile and fixed-line telephone accounts. These top-up
services revenues increased 26.2% to A35.8 million in 2005 from A28.4 million in 2004, primarily because of
an increase in the number of top-ups sold through Lottomatica’s LIS and Totobit commercial networks
during the period reflecting the continued trend toward electronic top-ups to the detriment of the scratch
card top-up market. Revenues from ticketing services increased 14.1% to A5.3 million in 2005 from
A4.6 million in 2004. This increase is attributable to ticket services also being offered for cultural and music
events as well as for sporting events.
Lottomatica’s processing services generated revenues of A15.4 million in 2005 compared with
A10.5 million in 2004. This 47.0% increase in revenues is primarily due to an increase in the number of
transactions for which processing services and technology was provided to third parties (e.g., for payment
of car road taxes and electronic top-ups for pre-paid mobile telephones).
92
Revenues generated by payment and collection services remained flat in 2005 at A1.4 million.
PCC GS S.p.A. is a wholly-owned subsidiary of Lottomatica that supplies tickets for Lotto and
Lottomatica’s Sports Pools as well as tickets for third parties. Revenues generated by PCC GS S.p.A. for
the supply of these tickets for third parties in 2005 increased by 24.7% to A2.1 million from A1.7 million in
2004. This increase was due to an increase in the number of transactions performed by PCC GS S.p.A. for
these third parties in 2005.
Other revenues. Lottomatica’s Total Revenues also include Other Revenues. Lottomatica’s Other
Revenues for 2005 consist primarily of (i) operating contributions to Consorzio Lotterie Nazionali, which
operates the Instant and Traditional Lotteries business, by its other members, (ii) the release of provisions
taken in 2004, primarily in respect of litigation costs released in 2005 when the actual litigation costs paid
were less than the amount of the relevant provision and (iii) management fees received from Sarabet S.r.l.
for the management of wagers on Lottomatica betting. Other Revenues were A13.5 million in 2005
compared to A15.9 million in 2004, a decrease of A2.4 million, or 15.3%.
Costs of Production
Costs of production consist of costs of raw materials and consumables, costs for services, personnel
costs, amortisation, depreciation and write-downs, and other operating expenses. Costs of Production
decreased by A46.2 million in 2005, or 11.1%, to A370.3 million in 2005 from A416.5 million in 2004. This
was primarily due to the continued success of Lottomatica’s cost savings initiatives focusing on network
costs, maintenance costs, raw material costs and improved efficiencies in distribution. The 11.1% decrease
was primarily due to decreases in costs of services and in amortisation, depreciation and write-downs and
was partially offset by increases in the costs of raw materials and consumables and in personnel costs, each
of which is more particularly described below.
Costs of raw materials and consumables. The costs of raw materials and consumables increased in
2005 to A31.1 million from A29.3 million in 2004, or 6.1%. This increase is primarily due to an increase in
the volume of lottery tickets purchased for the Instant and Traditional Lotteries business and also, to a
lesser extent, an increase in the cost of paper which was partially offset by a decrease in the number of
Lotto tickets sold in 2005 as a result of the lower number of bets placed.
Costs for services. Costs for the provision of services were A188.5 million in 2005, compared with
A218.7 million in 2004, a decrease of A30.2 million, or 13.8%. The following table sets forth a break-down
of the items comprising costs for the provision of services in 2005 and 2004.
Year Ended
Year Ended
December 31, December 31,
2005
2004
Costs for services
Network management . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . .
Office costs . . . . . . . . . . . . . . . . . .
Assistance for bet collection points .
Research and advertising . . . . . . . .
Services rendered by third parties .
Corporate bodies . . . . . . . . . . . . .
Banking costs and services . . . . . . .
Non-capitalised IAS costs . . . . . . .
Other costs . . . . . . . . . . . . . . . . . .
Rental costs . . . . . . . . . . . . . . . . .
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.
42,460
13,354
7,645
24,214
42,257
29,937
1,560
1,695
739
11,651
12,981
52,410
29,596
7,774
22,345
38,613
35,792
1,698
1,388
13,538
15,555
—
(19.0)%
(54.9)%
(1.7)%
8.4%
9.4%
(16.4)%
(8.1)%
22.1%
(94.5)%
(25.1)%
—
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
188,493
218,709
(13.8)%
93
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.
%
Change
The A30.2 million decrease in costs for the provision of services was primarily due to:
• the A16.2 million reduction in Maintenance costs following the installation of new Lotto terminals,
primarily because these new terminals require less maintenance than the older terminals they
replaced, and repairs are covered by the manufacturer’s warranty for a period of three years, as to
100% of the cost of repairs carried out in the first two years and as to 50% of the cost of repairs
carried out in the third year;
• the A12.8 million decrease in Non-capitalised IAS costs due to the marketing costs associated with
the start-up of Instant and Traditional Lotteries in 2004;
• the A9.9 million reduction in Network management costs due to the migration of Lottomatica’s data
transmission systems from a fixed-line service to the IP (Internet Protocol) system leading to a
reduction in line rental costs; and
• the A5.8 million reduction in costs for services rendered by third parties, primarily in respect of the
supply of tickets for Lottomatica’s sports pools business due to a renegotiation of commercial terms
with counterparties and a rationalisation of the frequency and size of deliveries of tickets.
The A30.2 million decrease was partially offset by the A3.6 million increase in research advertising
costs in connection with the launch of new Instant and Traditional Lotteries games, new games linked to
Totocalcio and the Gaming Machine business and the A1.9 million increase in costs related to assistance for
bet collection points. Advertising costs include the amounts to be devoted to advertising the Lotto game in
an amount equal to 7% of the net income received in the previous financial year. In addition, rental costs
increased in 2005 because these costs were recorded in 2004 under IFRS as ‘‘other operating expenses’’. In
2005, Lottomatica began to record these costs, in accordance with IFRS, as costs.
Personnel costs. Personnel costs were A72.3 million in 2005, compared with A66.2 million in 2004, an
increase of A6.1 million or 9.2%. The increase was primarily due to an increase in the number of employees
employed by Lottomatica and its subsidiaries and a consequential increase in social security contributions,
and an increase in the costs associated with stock options. In addition, Lottomatica made some employees
redundant during 2005 as part of its ongoing policy to streamline its operations and the costs of those
redundancies are included in personnel costs.
Amortisation, depreciation and write-downs. Amortisation, depreciation and write-downs were
A53.6 million in 2005, compared with A62.6 million in 2004, a decrease of A9.0 million or 14.3%.
amortisation, depreciation and write-downs includes amortisation of intangible assets, depreciation of
tangible assets and write-down of fixed assets and current receivables. The decrease in amortisation,
depreciation and write-downs was primarily due to the fact that the depreciation period for certain plant
and machinery came to an end in 2004. In addition, the new Lotto terminals designed to replace older
terminals were installed at the end of 2005, which resulted in depreciation of plant and machinery only
being taken in the last months of 2005.
94
retirement plans, he or she will receive a payment equal to any unvested portion of his or her accounts in
such retirement plans. Furthermore, any unvested retention equity awards (or, in the case of Mr. Patel, any
unvested equity awards) granted pursuant to the new employment agreement (as described below) then
held by the executive will become fully vested, and the executive will be entitled to exercise any vested
stock options that he or she holds until the earlier of 18 months from the date of termination of
employment or the date such stock options expire.
In the event of a termination of an executive’s employment as a result of retirement (which cannot
occur until the fifth anniversary of the proposed Merger and until the sum of his or her age and years of
service with Lottomatica and GTECH is at least 65), any vested stock options that the executive holds will
remain exercisable until they expire, and the executive will be entitled to accelerated vesting of some or all
of the unvested stock restricted stock units that were granted pursuant to the employment agreement. The
percentage of unvested awards that accelerates will depend on the executive’s age and years of service at
the time of retirement.
The new employment agreements provide that Lottomatica will enter into a tax equalisation
agreement with the applicable executive to make the executive whole to the extent that his or her total tax
liability under both United States and Italian tax laws is in excess of the total tax liability if the executive
was only subject to tax under United States laws.
Mr. Sweitzer’s new employment agreement will also provide that upon expiration of employment,
GTECH will offer to enter into a consulting arrangement with Mr. Sweitzer.
Management Equity Reinvestment. The new employment agreements with each of the Covered
Officers (other than Ms. Laverty O’Conner and Mr. Sweitzer) will also provide that each such officer
currently holding GTECH shares will invest at least 50% of his net after-tax payments received as Merger
consideration or option proceeds to purchase newly issued shares of Lottomatica stock after completion of
the proposed Merger, at the Rights Offering subscription price. Pursuant to the terms of the new
employment agreements, the shares will not be transferable until the earlier of the three-year anniversary
of the effective date of the proposed Merger or the termination of the applicable executive’s employment
with Lottomatica and/or GTECH. Mr. Sweitzers agreement provides he will invest an amount, not to
exceed U.S.$1 million, from his net after-tax payments received as Merger consideration or option
proceeds to purchase newly issued Shares of Lottomatica stock after completion of the proposed Merger,
at the Rights Offering subscription price.
Equity Based Grants. The new employment agreements will provide that the Covered Officers will be
eligible for annual grants of stock options and other equity-based awards under Lottomatica’s long-term
incentive plans. Of such future equity grants, at least 35% will consist of restricted stock units that will be
settled in fully vested shares of Lottomatica stock upon the achievement of target performance goals. In
addition, within 60 days following completion of the proposed Merger, each Covered Officer (other than
Ms. Laverty O’Conner) will be entitled to a grant of equity-based awards set forth in the table below. The
value of such awards on the grant date will be split 65% stock options (the value of which will be
determined on a Black-Scholes basis) and 35% restricted stock units (the value of which will be
determined based on the price of Lottomatica’s ordinary shares on the grant date). The stock options will
vest in a manner consistent with stock options granted to other senior executives of Lottomatica. The
restricted stock units will vest upon the achievement of target performance goals in a manner consistent
with the equity compensation policies for other senior executives of Lottomatica.
The new employment agreements provide that Lottomatica may substitute equivalent awards payable
in cash for any stock options or restricted stock units granted pursuant to the employment agreements.
250
The value and number of shares subject to each executive officer’s awards will be as provided in the
following table:
Value
(U.S. dollars)
Estimated
Number of Shares
Mr. Turner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
RSUs
Total
3,900,000
2,100,000
6,000,000
368,620
47,781
416,401
Mr. DeSocio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
RSUs
Total
796,250
428,750
1,225,000
75,259
9,755
85,014
Mr. Patel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
RSUs
Total
1,365,000
735,000
2,100,000
129,017
16,723
145,740
Mr. Sweitzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
731,250
69,116
RSUs
393,750
8,959
Total
1,125,000
78,075
Following completion of the proposed Merger, and pursuant to the terms of his or her new
employment agreement, each Covered Officer will also be entitled to a retention equity award of restricted
stock units with respect to a number of Lottomatica ordinary shares, payable in fully vested shares of
Lottomatica stock over a five-year period. The awards will vest and be payable in five annual installments,
on each of the first five anniversaries of the completion of the proposed Merger, provided that such officer
is still employed by Lottomatica on the relevant vesting dates. The Covered Officers will be entitled to
restricted stock units with respect to the following numbers of shares that have the following values (based
on a price of Lottomatica’s stock equal to U.S.$43.95 per share): Turner (232,500, U.S.$10,218,375), Patel
(82,600, U.S.$3,630,270), DeSocio (34,500, U.S.$1,516,275), and Laverty O’Connor (12,500, U.S.$549,375).
Mr Sweitzer will be entitled to 16,000 restricted stock units with a value of U.S.$703,200 for his two year
employment term, with an additional award of 8,000 restricted stock units with a value of U.S.$351,600 for
each year his employment term is extended. In the event of a subsequent change in control following the
proposed Merger, any Lottomatica equity awards then held by such officer that have not vested will
become fully vested and, in the case of stock options, immediately exercisable.
Arrangements with Other Executive Officers. Prior to completion of the proposed Merger,
Messrs. Pieri and Plourde are expected to enter into amended severance agreements and change in control
agreements, in substitution for their existing severance agreements and change in control agreements,
containing provisions substantially similar to the terms and conditions summarised above with respect to
such matters for the Covered Officers. In consideration of such amended severance agreements and
change of control agreements, Messrs. Pieri and Plourde will each invest 25% of his net after-tax payments
received as Merger consideration to purchase newly issued ordinary shares of Lottomatica after
completion of the proposed Merger, at the Rights Offering subscription price. Both Messrs. Pieri and
Plourde are also expected to receive a grant of equity-based awards that have values of U.S.$175,000 and
U.S.$350,000, respectively. In addition, Messrs. Pieri and Plourde are expected to receive a grant of
retention equity awards of restricted stock units on the same terms and conditions as summarised above
with respect to the Covered Officers that have a value of U.S.$472,463 and U.S.$560,363, respectively.
Interests of Members of the Board of Directors, Board of Statutory Auditors and Senior Management
in Lottomatica’s Share Capital
To the best of the knowledge of Lottomatica, as of the date of this Offering Circular, none of the
directors, statutory auditors or senior managers of Lottomatica own, directly or indirectly any shares of
Lottomatica, except for Ms. Emanuela Chiti, Chief of Internal Audits of Lottomatica, who holds 15,808
251
Value of Production
Value of production, which comprises revenues from sales and services and other revenues (including
capitalisation of internal construction costs, other earnings and proceeds and changes in work in progress,
but excluding changes in other inventory items) was A1,234.3 million in 2004, compared with A961.1 million
in 2003, an increase of A273.2 million, or 28.4%.
This increase was primarily due to the increase in revenues from sales and services and other earnings
and proceeds described below. Under Italian GAAP, revenues for Lottomatica’s electronic top-ups for
pre-paid mobile and fixed-line telephone accounts are recorded as gross revenues including the costs
related to the provision of such services; and the related costs are therefore included in costs of
production. See ‘‘—Transition to IFRS—Revenue Recognition (IAS18)’’ above. For the year ended
December 31, 2004, these costs amounted to A647.5 million, compared with A242.7 million for the prior
period.
Revenues. The table set forth below shows Lottomatica’s revenues from sales and services, and other
revenues, for each of 2004 and 2003:
Year Ended
Year Ended
December 31,
December 31,
2004
2003
Total
Revenues
Lotteries:
Lotto . . . . . . . . . . . . . . . . . . . .
Sports Games:
Sports Pools . . . . . . . . . . . . . . .
Betting services . . . . . . . . . . . . .
Tris . . . . . . . . . . . . . . . . . . . . .
F 101 . . . . . . . . . . . . . . . . . . . .
Total Lotteries . . . . . . . . . . . . .
Gaming Machines:
AWPs . . . . . . . . . . . . . . . . . . .
Total Gaming Machines . . . . . .
............
............
494,210
15,808
40.0% 412,835
1.3%
—
42.9%
—
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.
.
.
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.
.
4,015
2,150
3,128
—
519,311
0.3% 5,300
0.2% 2,952
0.2% 1,055
—
218
42.1% 422,360
0.5%
0.3%
0.1%
0.0%
43.9%
............
............
582
582
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Total Lotteries and Games . . . . . . . .
Services
Commercial Services:
Top-ups—(LIS and Totobit networks) .
Sport ticket office services . . . . . . . . .
Processing Services:
Car road tax . . . . . . . . . . . . . . . . . . .
Totobit system . . . . . . . . . . . . . . . . .
Payment and Collection Services:
Municipal services . . . . . . . . . . . . . . .
Unified state taxes . . . . . . . . . . . . . .
RAI television license . . . . . . . . . . . .
Other services . . . . . . . . . . . . . . . . . . .
Total Services . . . . . . . . . . . . . . . . . .
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.
0.0%
0.0%
—
—
—
—
........
519,893
42.1% 422,360
43.9%
........
........
677,110
4,612
54.9% 259,559
0.4% 4,306
27.0%
0.4%
........
........
7,788
2,721
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286
492
584
3,324
696,917
PCC GS S.p.A. . . . . . . . . . . . . . . . . . . . . . . . . . .
1,726
Discontinued operations:
GBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Other Revenues . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL REVENUES . . . . . . . . . . . . . . . . . . . . . . .
15,710
1,234,246
97
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.
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.
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.
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.
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.
0.6%
0.2%
8,049
—
0.8%
—
0.0%
217
0.0%
475
0.0%
663
0.3%
3
56.4% 273,272
0.0%
0.0%
0.1%
0.0%
28.4%
0.1%
5,069
0.5%
256,159
26.7%
1.3% 4,282
100.0% 961,142
0.4%
100.0%
—
Total revenues, comprising revenues from sales and services and other revenues were A1,234.2 million
in 2004 compared with A961.1 million in 2003, an increase of A273.2 million, or 28.4%.
Revenues from sales and services were A1,218.5 million in 2004, compared with A956.9 million in 2003,
an increase of A261.6 million, or 27.3%. This increase was primarily due to an increase in revenues from
Lotto of A81.4 million, or 19.7%, an increase in revenues (including their related costs) from electronic
top-up services for pre-paid mobile and fixed-line telephone accounts of A417.6 million, or 160.9%, and the
inclusion of A15.8 million of revenues from Instant and Traditional Lotteries launched in mid-2004,
partially offset by the loss of revenues in 2004 from Lottomatica’s bingo business as a consequence of the
exit by Lottomatica from the Bingo business through the sale of its 50% interest in GBC. In 2003, GBC
generated revenues of A256.2 million.
Revenues generated by Lotteries in 2004 were A519.3 million compared with A422.3 million in 2003,
an increase of A97.0 million, or 23.0%. This was primarily due to an increase in revenues from Lotto, as
well as revenues generated by Instant and Traditional Lotteries, which commenced in 2004. Revenues from
Lotto increased from A412.8 million in 2003 to A494.2 million in 2004, an increase of A81.4 million or
19.7%. This increase was primarily due to the increase in overall wagers to approximately A11.7 billion in
2004 from approximately A6.9 billion in 2003.
Lottomatica believes that the increase in overall wagers in 2004 was the result of substantial growth in
speculative bets made on ‘‘late numbers’’ (those numbers that have not been drawn for more than 100
drawings), to approximately A5.6 billion in 2004 from approximately A1.4 billion in 2003, and that this
growth also had a limited effect on the amount of core bets. Lottomatica believes that this was a primary
factor leading to:
• an increase in the size of the average wager from A2.7 in 2003 to A3.9 in 2004, and
• an increase in the overall number of bets from 2.6 billion in 2003 to 3.0 billion in 2004.
Lottomatica’s Instant and Traditional Lotteries business commenced in 2004 following the grant by
the Ministry of Economy and Finances to Consorzio Lotterie Nazionali, a consortium 63% owned by
Lottomatica, of the exclusive concession to operate Instant and Traditional Lotteries in the Republic of
Italy. This business generated revenues in 2004 of A15.8 million. Lottomatica also commenced its Gaming
Machines business in 2004, generating revenues of A0.6 million.
Revenues generated by Lottomatica’s Services business were A696.9 million in 2004 compared with
A273.3 million in 2003, an increase of A423.6 million or 155.0%. As discussed above, under Italian GAAP
these revenues are expressed on a gross basis including the related costs of providing such services. These
costs almost entirely consist of the costs related to the provision of electronic top-up services for pre-paid
mobile and fixed line telephone accounts. In 2004, these costs were A647.5 million compared with
A242.7 million in 2003.
The increase in revenues from Lottomatica’s Services business was primarily due to the 160.9%
increase in revenues from electronic top-up services, which increased from A259.6 million in 2003 to
A677.1 million in 2004. This 160.9% increase was due to a 29.8% increase in revenues generated from
Lottomatica’s LIS point of sale network, from A259.6 million in 2003 to A336.9 million in 2004, and the
A340.1 million revenues generated in 2004 by Totobit following its acquisition by Lottomatica in 2003. This
increase also reflected the continued trend toward electronic top-ups to the detriment of the scratch card
top-up market. The increase in revenues generated by Lottomatica’s Services business was partially offset
by the sale by Lottomatica of its 50% interest in GBC in 2004 as Lottomatica exited the Bingo business. In
2003, GBC generated revenues of A256.2 million.
Revenues from Other Services were A3.3 million in 2004 compared with almost zero in 2003. These
revenues in 2004 derive from the acquisition of Totobit and consist of the contributions to the costs of a
marketing and advertising campaign paid to Lottomatica by the operators of the points of sale in the
Totobit commercial network.
98
DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Credit Facilities
In connection with the Acquisition, Acquisition Subsidiary (‘‘Borrower’’), an indirect subsidiary of
Lottomatica (in such capacity, the ‘‘Parent’’) that will be merged with and into GTECH, has entered into
the Senior Credit Facilities Agreement, on terms substantially as described below, with Credit Suisse
International, Credit Suisse, London Branch and Goldman Sachs Credit Partners L.P., and certain other
lenders as original lenders, Bank of America, N.A., as agent, and certain other parties thereto. The
obligations of the Borrower under the Senior Credit Facilities Agreement rank at least pari passu with the
claims of all its other unsecured and unsubordinated creditors, except for obligations mandatorily
preferred by law applying to companies generally. The obligations of the Borrower are guaranteed on a
senior, unsecured basis as described below. The Senior Credit Facilities mature 6 years from the closing of
the Acquisition and may be pre-paid in minimum amounts at any time prior to maturity without premium
or penalty, subject to an indemnity for break costs.
Term Facility, Revolving Facility and Guarantee Facility
The Senior Credit Facilities consist of:
• a maximum of U.S.$2.26 billion senior term loan facilities (the ‘‘Term Facilities’’);
• a maximum of U.S.$250 million senior revolving credit facility (the ‘‘Revolving Facility’’); and
• a maximum of U.S.$250 million senior guarantee facility (the ‘‘Guarantee Facility’’).
Pursuant to the Term Facilities, lenders have agreed to advance up to U.S.$1.710 billion in Term
Facility A loans and up to U.S.$550 million in Term Facility B loans. Term Facility A loans are only
available to be applied to payment of the purchase price for the GTECH shares, to pay the costs of the
Acquisition and to refinance certain existing indebtedness of GTECH and its subsidiaries. Term Facility B
loans are only available to be applied towards the refinancing of the GTECH senior notes and to pay the
costs associated with the redemption thereof.
Pursuant to the Revolving Facility, lenders have agreed to advance revolving facility loans available in
U.S. dollars, euros, Sterling or certain other approved currencies in an amount of up to the equivalent of
U.S.$250 million to finance working capital requirements and for general corporate purposes of the
Parent, Borrower and their respective subsidiaries, excluding acquisitions/mergers or prepayment of the
Term Facilities. The Revolving Facility may not be utilised unless Term Facility A has been utilised in full
and/or cancelled.
The lenders have agreed to make available to the Borrower a Guarantee Facility, available in U.S.
dollars, euros, Sterling or certain other approved currencies, in an amount of up to the equivalent of
U.S.$250 million. The Guarantee Facility may be utilised by the Borrower to provide letters of credit,
guarantees or other instruments of similar nature, each as required in the ordinary course of business of
the Parent, the Borrower and their respective subsidiaries.The Guarantee Facility may not be utilised
unless Term Facility A has been utilised in full and/or cancelled.
If the Borrower and the Lenders agree, a Lender may provide ‘‘Ancillary Facilities’’ in place of all or
part of that Lender’s unutilised Revolving Facility commitment.
Interest Rate
The interest rate applicable to loans made under the Term Facilities and Revolving Facility is equal to
LIBOR, or, in the case of loans in Euros, to EURIBOR, in each case, increased by the margin (equal to
0.75%, with forecast for revisions decreasing to 0.45% when certain predetermined financial parameters
are met) and other mandatory costs, if any. However, if at any time the Parent, the Borrower and their
260
respective subsidiaries as a group fail to maintain a corporate credit rating from Moody’s and S&P,
respectively, of Baa3/BBB—, the margin increases to 1.5% per annum until such time as the required
ratings are reinstated, in which case the margin will once again return to be determined in accordance with
the criteria described above.
Representations, Warranties and Covenants
The Senior Credit Facilities Agreement contains representations, warranties and covenants customary
for such facilities. The Parent is required to ensure that it, the Borrower and their respective subsidiaries as
a group meet certain financial covenants concerning a minimum ratio of EBITDA to Total Net Interest
Costs, a maximum ratio of Total Net Debt to EBITDA and a maximum amount of capital expenditure over
certain specified periods (with certain provisions permitting Parent, the Borrower and their respective
subsidiaries as a group to carry forward specified permitted capital expenditures to the extent unused). The
limitation on capital expenditure is not applicable for so long as Parent, the Borrower and their respective
subsidiaries as a group maintain a corporate rating upgrade to Baa2/BBB by, respectively, Moody’s
Investors Services and Standard and Poor’s.
The Senior Credit Facilities Agreement contains negative covenants limiting, among other things (and
subject to certain exceptions), the activities of the obligors. These negative covenants include restrictions
on disposals of assets, change of business, mergers, demergers and reorganisations, the grant and
incurrence of financial indebtedness (including guarantees), acquisitions and joint ventures, movement of
cash, grant of security, the redemption, repurchase and acquisition of capital stock, the making of
payments (including dividends and any other returns to investors) subject to a certain fixed charge cover
ratio, variation of the merger documents, variation of material contracts and the documentation in relation
to the Rights Offering, transactions with affiliates, the activities of Invest Games and Holdings other than
as holding companies and certain amendments to the Securities documentation.
In addition, the Senior Credit Facilities Agreement contains positive covenants providing that the
Parent will use commercially reasonable efforts to maintain a corporate credit rating from Moody’s and
Standard and Poor’s, respectively, of at least Baa3/BBB—, the Borrower will exercise (or shall procure the
exercise of) the call options under the existing GTECH senior notes within five business days after
completion of the Acquisition pursuant to the Merger Agreement, certain specified sections of the
structure memorandum and certain other customary covenants.
The Senior Credit Facilities Agreement prohibits Lottomatica from: (i) declaring, making or paying
any dividend, charge, fee or other distribution (whether in cash or in kind) on or in respect of its share
capital (or any class of its share capital); (ii) repaying or distributing any dividend or share premium
reserve; (iii) paying or allowing any member of the group to pay any management, advisory or other fee to
or to the order of any of the shareholders of Lottomatica; or (iv) redeeming, repurchasing, defeasing,
retiring or repaying any of its share capital or resolving to do so (except in connection with share capital
owned by management of Lottomatica as part of an employee compensation plan, including, without
limitation, stock based compensation and management incentive plans), unless (i) Lottomatica’s Fixed
Charge Cover Ratio (generally defined in the Senior Credit Facilities Agreement as the ratio of the
Combined Group’s free cash-flow before debt service to total debt service) of the preceding year (adjusted
to reflect the proposed amount) is not less than 1.15x and (ii) no Event of Default (as defined in the Senior
Credit Facilities Agreement) shall have occurred and be continuing.
Events of Default
The Senior Credit Facilities Agreement contains customary events of default that are subject to
certain exceptions and concepts of materiality and grace periods. An event of default may arise in
circumstances of, among others, non-payment of obligations, breach of a financial covenant, breach of an
undertaking, misrepresentation, unlawfulness or repudiation of a material provision in the finance
261
Depreciation of tangible assets was A46.7 million in 2004, compared with A45.8 million in 2003, an
increase of A0.9 million, or 1.9%. The increase was due to the purchase of plant and equipment during the
year. Depreciation of tangible assets includes depreciation for assets which Lottomatica will be required to
return to AAMS at the conclusion of the Lotto concession and assets owned by Lottomatica which are not
subject to such a requirement.
Write-down of current receivables was A1.7 million in 2004, compared with A0.03 million in 2004, an
increase of A1.7 million. The increase primarily resulted from a write-down of A1.2 million in respect of
receivables at Totobit (acquired in late 2003 and accounted for in 2004 for the first time).
Change in inventories and provisions for risks. Changes in inventories amounted to a deficit of
A0.9 million in 2004, compared with A0.2 million in 2003, a decrease of A1.1 million, which is mostly
attributable to the reduction in the purchase of activation codes for Vodafone and Telecom electronic
top-ups for pre-paid mobile telephone accounts, reflecting the inclusion of the Totobit group in
Lottomatica’s consolidated group for the first time in 2004.
Provisions for risks were A2.7 million in 2004, compared with A0.01 million in 2003, an increase of
A2.7 million. The increase resulted from a provision of A1.8 million in respect of the early termination of
the supply contract for Traditional Lotteries tickets, a provision of A0.5 million for risks relating to support
contracts entered into by the Totobit Group and acquired as part of Lottomatica’s Totobit acquisition, and
a provision of A0.5 million relating to the number of bet collection points Lottomatica estimates will fail to
pay the pre-set fee on the volume collected for the Totocalcio game.
Other provisions. Other provisions were A5.5 million in 2004, compared with A1.1 million in 2003, an
increase of A4.4 million. The increase is primarily the result of a provision of A1.8 million for amounts due
to AAMS (but not yet paid) under Lottomatica’s license to operate entertainment games as a result of
delays encountered in the activation in 2004 of the gaming terminals, and a provision of A3.3 million
representing the amount set aside by Consorzio Lotterie Nazionali in relation to potential losses under the
foreign exchange rate derivative instrument not yet realised, representing mark-to-market adjustments
which do not necessarily imply a future payment.
Other operating expenses. Other operating expenses were A13.1 million in 2004, compared to
A4.1 million in 2003, an increase of A9.0 million. The increase resulted primarily from (i) charitable
donations amounting to A7.1 million, (ii) the pro rata portion of unrecoverable VAT amounting to
A0.8 million, (iii) A0.7 million paid to AAMS in respect of Lottomatica’s use of the Lotto terminals for the
provision of certain of its services and (iv) the payment of promotional costs in an amount approximately
equal to A0.7 million associated with a sports and arts charity and a therapy project at a children’s hospital.
Net financial income/expense. Net financial expense was A13.4 million in 2004, compared with net
financial income of A23.5 million in 2003, a decrease of A36.9 million. The following table sets forth a
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Optionally Deferred Interest and Additional Amounts thereon, if any, payable in respect of the Securities
(regardless of whether such amounts have become payable before, or as a result of, such event) will rank:
(a) pari passu and without any preference among themselves;
(b) pari passu with any other present or future obligations of the Issuer under any Liquidation Parity
Securities;
(c) junior to the claims of all other unsubordinated and subordinated creditors (including any claims
pursuant to Article 2411, first paragraph, of the Italian Civil Code) of the Issuer, other than
holders of Liquidation Parity Securities; and
(d) in priority to (i) the claims of holders of ordinary shares of the Issuer, (ii) the claims of holders of
any financial instruments (strumenti finanziari) issued by the Issuer pursuant to Article 2349 of
the Italian Civil Code, (iii) any claims in respect of any savings shares and any preference shares
of the Issuer and any other equity interest in the Issuer and (iv) any claims against the Issuer
which, by their terms or by operation of law, rank pari passu with the claims described in (i),
(ii) or (iii) above (together, ‘‘Junior Obligations’’).
In the event of (i) the commencement of a voluntary or involuntary liquidation, dissolution or
winding-up of the Issuer due to corporate action or an administrative and/or court order, or (ii) the
occurrence of any Insolvency Proceedings, subject to applicable bankruptcy law, the rights of the
Securityholders and the Trustee to payment of unpaid Equity Funded Deferred Interest and Additional
Amounts thereon, if any, payable in respect of the Securities (regardless of whether such amounts have
become payable before, or as a result of, such event) will rank:
(a) pari passu and without any preference among themselves;
(b) in priority to (i) the claims of holders of ordinary shares of the Issuer, (ii) the claims of holders of
any financial instruments (strumenti finanziari) issued by the Issuer pursuant to Article 2349 of
the Italian Civil Code, (iii) any claims in respect of any savings shares and any preference shares
of the Issuer and any other equity interest in the Issuer to the extent that such claims relate to the
nominal capital thereof and (iv) any claims against the Issuer which, by their terms or by
operation of law, rank pari passu with the claims described in (i), (ii) or (iii) above; and
(c) junior to the claims of all unsubordinated and subordinated creditors (including any claims
pursuant to Article 2411, first paragraph, of the Italian Civil Code) of the Issuer, including
holders of Liquidation Parity Securities and the holders of any preference shares and any savings
shares of the Issuer and any other equity interest (other than ordinary shares) in the Issuer (to
the extent that such claims do not relate to the nominal capital thereof).
A Securityholder may not, subject to mandatory provisions of applicable law, set-off any claims arising
under the Securities against any claims the Issuer may have against it.
As at the date of this Offering Circular no Liquidation Parity Securities, savings shares, preference shares or
other equity instruments which may be issued by the Issuer pursuant to Article 2349 of the Italian Civil Code
were outstanding.
3.
INTEREST
3.1 Fixed Rate Payment Dates
Subject to Condition 6.4, the Securities bear interest on their aggregate principal amount, on a daily
basis, at a rate of 8.25% per annum (the ‘‘Fixed Interest Rate’’) from (and including) the Issue Date to (but
excluding) the Reset Date payable (subject to Condition 4) annually in arrear on March 31 in each year
(each, a ‘‘Fixed Rate Payment Date’’), commencing on March 31, 2007 and ending on (and including) the
Reset Date.
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(iv) the date which is 180 days after the date on which any petition is filed by any third party in
connection with any Insolvency Proceedings in respect of the Issuer, where such petition has
not been dismissed by such 180th day; and
(v) the date on which an order is made or a resolution is passed for the voluntary or involuntary
liquidation, dissolution or winding up of, or an administrative and/or court order is made for
any Insolvency Proceedings in respect of, the Issuer, or the date on which the Issuer takes
any corporate action for the purposes of opening, or initiates or consents to, Insolvency
Proceedings in respect of it.
Any Optionally Deferred Interest that has not been paid in full in cash by the Issuer on or before
the fifth anniversary of the Interest Payment Date on which payment thereof was first deferred in
accordance with this Condition 4.1 shall, from such fifth anniversary, no longer be referred to
Optionally Deferred Interest but shall be referred to as ‘‘Old Optionally Deferred Interest’’, and
may only be paid pursuant to Conditions 4.3 and 5.
4.2 Mandatory deferral of interest
The Issuer shall not pay any Scheduled Interest Amount on an Interest Payment Date if, as at the
relevant Test Date, a Mandatory Deferral Event has occurred, unless and to the extent that the Issuer has
available cash proceeds raised from the offer, issue and sale or contribution of Issuer Equity during the six
month period ending on such Interest Payment Date and specified at the time of such offer, issue and sale
or contribution to be for the purpose of enabling the payment of all or part of such Scheduled Interest
Amount. Any Scheduled Interest Amount (or part thereof) not paid pursuant to the provisions of this
Condition 4.2 (‘‘Mandatorily Deferred Interest’’) shall be deemed accrued on the relevant Interest Payment
Date notwithstanding deferral of the payment thereof, and shall remain accrued until paid in full but shall
not itself accrue interest. Non-payment of any Scheduled Interest Amount (or part thereof) pursuant to
this Condition 4.2 shall not constitute an Enforcement Event or otherwise be subject to enforcement
except as provided in Condition 9. Mandatorily Deferred Interest may only be paid pursuant to Conditions
4.3 and 5.
A ‘‘Mandatory Deferral Event’’ shall be deemed to occur in respect of an Interest Payment Date if the
Coverage Ratio as of the relevant Test Date is less than or equal to 1.35.
The Issuer will give to the Principal Paying and Transfer Agent, the Registrar and the Trustee (in an
Officer’s Certificate of the Issuer) and the Securityholders in accordance with Condition 15 notice not later
than five business days prior to the relevant Interest Payment Date of the occurrence of a Mandatory
Deferral Event as at the relevant Test Date.
An Officer’s Certificate of the Issuer addressed to the Trustee as to the amount of Capital
Expenditure, EBITDA, ESOP Cashflow, Interest Expense and Taxes Paid, as to the Coverage Ratio or as
to whether a Mandatory Deferral Event has occurred or will occur or not occur at any time may, in the
absence of manifest error be relied upon by the Trustee and, if so relied upon, shall be conclusive and
binding on the Issuer and the Securityholders.
4.3 Equity Funded Deferred Interest
For so long as any Old Optionally Deferred Interest or Mandatorily Deferred Interest (together,
‘‘Equity Funded Deferred Interest’’) remains unpaid, the Issuer must take all steps necessary (in compliance
with applicable law) to fund payment of the same pursuant to Condition 5.2, but such Equity Funded
Deferred Interest will become immediately payable in cash on the date which is the earliest to occur of:
(a) 7 business days following the settlement of an issue, offer and sale or contribution of Issuer
Equity in accordance with Condition 5, to the extent of the proceeds thereof received by the
Issuer;
272
(b) the tenth anniversary of the Interest Payment Date on which such payment thereof was first
deferred in accordance with these Conditions;
(c) the due date for redemption of the Securities, whether at the Maturity Date, any Early
Redemption Date, or the date on which the Securities become immediately due and repayable
pursuant to Condition 9.3;
(d) the date which is 180 days after the date on which any petition is filed by any third party in
connection with any Insolvency Proceedings in respect of the Issuer, where such petition has not
been dismissed by such 180th day; and
(e) the date on which an order is made or a resolution is passed for the voluntary or involuntary
liquidation, dissolution or winding up of, or an administrative and/or court order is made for any
Insolvency Proceedings in respect of, the Issuer, or the date on which the Issuer takes any
corporate action for the purposes of opening, or initiates or consents to, Insolvency Proceedings
in respect of it.
5.
EQUITY FUNDING OF EQUITY FUNDED DEFERRED INTEREST
5.1 Authorised Equity
For so long as any Securities are outstanding (as defined in the Trust Deed), the Issuer undertakes to
take all steps necessary (in compliance with applicable law) to keep available, as of the date of each
Annual General Meeting, Sufficient Authorised Equity.
Such steps shall include, but not be limited to the following:
(a) if, in the opinion of the board of directors of the Issuer prior to the date of each Annual General
Meeting, the Issuer will not have available on the date of such Annual General Meeting a
sufficient amount of Authorised Equity to fund the payment of all outstanding Equity Funded
Deferred Interest, the board of directors of the Issuer shall, in compliance with any applicable
law, propose a resolution at such Annual General Meeting for shareholders to resolve on the
authorisation for the issuance of ordinary shares in such number as will enable the Issuer to
(i) pay in full all accrued and unpaid Equity Funded Deferred Interest pursuant to Condition 5.2
and (ii) after doing so, have available Sufficient Authorised Equity. The Issuer shall estimate the
number of ordinary shares required for this purpose based on the prevailing market price for
such ordinary shares on or around the time of proposing such resolution; and
(b) if any resolution relating to the authorisation and issuance of new ordinary shares for the
payment of Equity Funded Deferred Interest proposed as provided in Condition 5.1(a) is not
approved and adopted by the shareholders of the Issuer at such Annual General Meeting, the
board of directors of the Issuer shall, in compliance with applicable law, propose a similar
resolution at the next Annual General Meeting of the Issuer. This process shall be repeated, in
compliance with applicable law, until the relevant resolution is approved and adopted.
If the Issuer does not have a sufficient number of ordinary shares available for issue, then the Issuer
shall give notice thereof to the Trustee (in an Officer’s Certificate of the Issuer) and the Securityholders in
accordance with Condition 15. The Issuer shall thereafter give notice to the Trustee (in an Officer’s
Certificate signed of the Issuer) and the Securityholders in accordance with Condition 15 of the
subsequent approval and adoption by the shareholders of the Issuer of any resolution relating to the
authorisation for issuance of ordinary shares to fund the payment of such unpaid Equity Funded Deferred
Interest, promptly following the date of the Annual General Meeting at which such resolution is passed.
The shareholders of the Issuer have initially authorised for issuance Authorised Equity of up to
B170 million in connection with these provisions.
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5.2 Payment of Equity Funded Deferred Interest
For as long as any Equity Funded Deferred Interest (or part thereof) remains unpaid, the Issuer must,
after obtaining all shareholder authorisations for the issue or creation of Issuer Equity, in compliance with
any applicable law and subject to Condition 5.3, promptly fund the full payment in cash of such Equity
Funded Deferred Interest, using the proceeds derived from the issue, offer and sale or contribution of
Issuer Equity raised in accordance with this Condition 5.2.
Promptly following the date on which Mandatorily Deferred Interest or Old Optionally Deferred
Interest, as the case may be, arises, the Issuer shall, after obtaining all shareholder authorisations for the
issue or creation of Issuer Equity, in compliance with any applicable law and subject to Condition 5.3:
(i) procure the issue, offer and sale or contribution of such amount of Issuer Equity as will result in
proceeds received by the Issuer, after any expenses relating thereto, of not less than the aggregate
amount of unpaid Equity Funded Deferred Interest; and
(ii) deliver to the Trustee or to the Principal Paying Agent a cash amount equal to the amount of
unpaid Equity Funded Deferred Interest as soon as practicable, but in any event within twenty
business days following the settlement of the relevant issue, offer and sale or contribution of
Issuer Equity. If such cash amount is received by the Trustee, the Trustee shall pay such amount
to the Principal Paying and Transfer Agent. The Principal Paying and Transfer Agent shall pay the
amount received by it to the Securityholders in respect of the relevant Equity Funded Deferred
Interest within ten business days following receipt thereof by the Principal Paying and Transfer
Agent (such date, the ‘‘Equity Funded Deferred Interest Payment Date’’).
If the proceeds of the issue, offer and sale or contribution of Issuer Equity received by the Issuer
pursuant to paragraph (i) above are insufficient to pay in full all unpaid Equity Funded Deferred Interest
on the relevant Equity Funded Deferred Interest Payment Date, then: (A) the Issuer’s obligations pursuant
to this Condition 5.2 shall continue until all unpaid Equity Funded Deferred Interest has been paid in full;
and (B) any payment in respect of Equity Funded Deferred Interest made to Securityholders on such
Equity Funded Deferred Interest Payment Date will be applied pro rata to all Securityholders and the
Issuer shall be released and discharged from its obligations under this Condition 5.2 only to the extent of
such amount applied, and the Securityholders shall have no further claim against the Issuer to that extent
(without prejudice to any claims in respect of any amount of Equity Funded Deferred Interest that remains
unpaid).
5.3 Market Disruption Event
The Issuer shall not be obliged to pay Equity Funded Deferred Interest pursuant to Condition 5.2 if a
Market Disruption Event has occurred and for so long as it is continuing, but the Issuer’s obligations
contained in Condition 5.2 shall recommence immediately upon the cessation of such Market Disruption
Event. The Issuer shall, as soon as practicable after becoming aware of the occurrence of a Market
Disruption Event at any time whilst any Equity Funded Deferred Interest remains unpaid, notify the same
to the Trustee (in an Officer’s Certificate of the Issuer) and to the Securityholders in accordance with
Condition 15. An Officer’s Certificate of the Issuer addressed to the Trustee as to the occurrence of a
Market Disruption Event may be relied upon by the Trustee as sufficient evidence thereof and if so relied
upon shall be conclusive and binding on the Issuer, the Trustee and the Securityholders.
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A31.8 million as of December 31, 2005, compared with A72.1 million as of December 31, 2004. The
decrease of A40.3 million, which resulted in a corresponding increase in cash and cash equivalents, was
primarily due to the decrease in 2005 of cash-flows from operating activities.
2004 compared with 2003
Cash-flows
The following table sets forth Lottomatica’s consolidated cash-flows for fiscal 2004 and 2003. This
information has been extracted from Lottomatica’s audited consolidated financial statements for fiscal
2004 and 2003, prepared in accordance with Italian GAAP, included elsewhere in this Offering Circular.
Year Ended
Year Ended
2004
2003
Consolidated Cash-flows
Cash-flows from operating activities . . . . . . . . . . . . .
Cash-flows from (used in) investing activities . . . . . .
Cash-flows from (used in) financing activities . . . . . .
Increase/(Decrease) in cash and cash equivalents .
%
Change
A 274,225
8,830
(240,569)
A 304,199
(146,865)
(78,813)
(9.9)%
(106.0)%
(205.2)%
E 42,486
E 78,521
(45.9)%
Cash-flows from operating activities. Lottomatica’s cash-flows from operating activities in 2004 were
A274.2 million compared with A304.2 million for 2003. This decrease was primarily due to the proceeds of
the sale of its investment in Scientific Games Corporation in 2003 being recorded as cash-flow from
operations. This decrease was partially offset by an increase in revenues from Lotto and the commercial
services business in 2004.
Cash-flows from or used in investing activities. Lottomatica’s cash-flows from investing activities for
2004 resulted in cash-flow from investing activities of A8.8 million compared with cash flow used in
investing activities for 2003 of A146.9 million. This cash-flow for 2004 was comprised of a cash inflow of
A64.0 million in respect of the sale of Lottomatica’s beneficial interest in 50% of GBC, offset by a cashoutflow of approximately A53.6 million in respect of investments in tangible and intangible assets and a
cash outflow of approximately A2.0 million for the acquisition by Lottomatica of the minority interests it
did not already own in Medialan S.p.A. and TTS Srl. The cash flow for 2003 was comprised of cash
outflows of approximately A19.3 million in respect of Lottomatica’s acquisition of Playservice S.p.A. (which
was subsequently merged with Bingo Plus), approximately A39.5 million in respect of the acquisition of
Totobit and approximately A10.3 million in respect of the acquisition of the interest in PCC GS S.p.A. that
Lottomatica did not already own. Cash-outflows of A8.4 million and A1.7 million also occurred during 2003
in respect of capital increases in GBC and LottoLatino Venezuela. Lottomatica was also required to make
a capital contribution to Consorzio Lotterie Nazionali of A10.0 million in 2003. Consorzio Lotterie
Nazionali was not consolidated by Lottomatica until it began trading in 2004. Lottomatica also made
investments in tangible and intangible assets of approximately A57.1 million in 2003.
Cash-flows used in financing activities. Lottomatica’s cash-flows used in financing activities for 2004
were A240.6 million compared with cash-flows used in financing activities for 2003 of A78.8 million. This
increase in cash-flows used in financing activities in 2004 was primarily due to the cash from the issuance of
Lottomatica’s A360.0 million 4.80% Senior Notes due 2008 arising in 2003, partially offset by the decrease
in the amount of dividends paid to Lottomatica’s shareholders in 2004 (which was A177.6 million,
compared with A292.2 million in 2003).
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Net Financial Position
The following table sets forth Lottomatica’s net financial position as of December 31, 2004 and 2003.
Lottomatica’s net financial position as of December 31, 2004 was A(48.4) million compared with A(168.7)
million at the prior year-end. This information has been extracted from Lottomatica’s audited consolidated
financial statements for fiscal 2004 and 2003 prepared in accordance with Italian GAAP.
As of
As of
2004
2003
Consolidated Net
Financial Position
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Short-term portions of long-term (payables)/
receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
A 241,595
Cash and cash equivalents/(Short-term debt) . . . . . .
E 237,679
(473)
3,443
A 199,109
(473)
20,288
E 178,348
%
Change
21.3%
0.0%
(83.0)%
33.3%
Long-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . .
(360,126)
(361,436)
Net debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
122,447
183,088
(33.1)%
Current financial assets . . . . . . . . . . . . . . . . . . . . . .
74,012
14,414
(413.5)%
Net financial position . . . . . . . . . . . . . . . . . . . . .
E (48,435)
E (168,674)
(0.4)%
(71.3)%
Cash and cash equivalents/short-term debt. As of December 31, 2004 Lottomatica’s net cash was
A237.7 million compared with A178.3 million as of December 31, 2003. Lottomatica’s net cash is the sum of
cash and cash equivalents, short-term portions of long-term payables or receivables and short-term loans.
Lottomatica’s cash and cash equivalents, which consist of cash at bank and on hand, were A241.6 million as
of December 31, 2004, compared with A199.1 million as of December 31, 2003. The increase in 2004
compared with 2003 was primarily due to the fact that the fee due to AAMS in respect of Lotteria Italia
was paid during January 2005 when the draw for Lotteria Italia was made, and an equivalent fee was not
paid in January 2004 as Consorzio Lotterie Nazionali, at that point, had not yet commenced operating
Lotteria Italia. The increase in 2004 was also due to the increased revenues generated by Lotto during that
year compared with 2003. Lottomatica’s short-term portions of long-term payables, representing the
accrued interest for the last week of the year for its A360.0 million 4.80% Senior Notes due 2008 (which
accrue interest payable annually in arrear on December 22), remained unchanged at A0.5 million.
Lottomatica’s short-term loans as of December 31, 2004 were A3.4 million compared with A20.3 million as
of December 31, 2003. This A16.9 million decrease was primarily due to an approximately A10.0 million
payable to Consorzio Lotterie Nazionali, because the consortium was formed in 2003 but was not
consolidated by Lottomatica until it commenced trading in 2004. The remaining A6.9 million related to a
number of non-material matters recorded in 2003.
Long-term Loans. Lottomatica’s long-term loans, which consist of the principal outstanding on its
A360.0 million 4.80% Senior Notes due 2008, amounted to A360.1 million as of December 31, 2004
compared with A361.4 million as of December 31, 2003.
Current Financial Assets. Lottomatica’s current financial assets, which primarily consist of Italian
Treasury Bonds purchased by Lottomatica, were A74.0 million as of December 31, 2004, compared with
A14.4 million as of December 31, 2003. The increase of A59.6 million was primarily due to the acquisition of
additional Italian Treasury Bonds with the proceeds from the sale of Lottomatica’s interest in GBC,
partially offset by a decrease in financial assets following the deconsolidation of GBC.
107
Cash Requirements
Lottomatica currently expects that its cash balances, cash equivalents, cash-flows from operations and
access to additional sources of capital, including the net proceeds of the Securities and the Rights Offering
and the funding committed to in respect of the Senior Credit Facilities, will be sufficient to fund its
anticipated working capital and ordinary capital expenditure needs, to service its debt obligations, to fund
anticipated internal growth, to fund all of the cash needed for any acquisitions, including its proposed
Acquisition of GTECH and to pay dividends. Lottomatica’s ability to pay dividends may be restricted by
the terms of the Senior Credit Facilities. Lottomatica expects that these sources will also be sufficient for
the completion of the replacement program for the Lotto terminals, the installation of new terminals in the
points of sale in Lottomatica’s LIS and Totobit commercial networks and new product launches in
Lottomatica’s Services business, the maintenance and development of Lottomatica’s network of AWP
machines, the improvement of Lottomatica’s Instant and Traditional Lotteries point of sale network and
for the development of new platform technology. However, Lottomatica will have a substantial amount of
indebtedness after this offering and the Acquisition. Its actual financing requirements will depend on a
number of factors, many of which are beyond its control. See ‘‘Risk Factors—Risk Factors Relating to
Lottomatica’’.
On January 10, 2006 Lottomatica entered into an agreement pursuant to which Lottomatica agreed to
acquire GTECH for U.S.$35.00 in cash per outstanding share of GTECH, for a total transaction value of
approximately A4.0 billion, including the assumption of GTECH’s existing debt. Completion of the
transaction is subject to receipt of financing, approval by GTECH’s shareholders, regulatory approvals,
receipt of contract assignment assurance from certain significant lottery customers, Lottomatica
maintaining a pro forma investment grade corporate credit rating, and other customary conditions.
Lottomatica intends to fund the transaction through (i) this offering of the Securities, (ii) the Rights
Offering, (iii) the U.S.$2.26 billion Term Facilities, and (iv) existing cash balances of Lottomatica and
GTECH.
Balance Sheet
Lottomatica’s balance sheet as of December 31, 2005, as compared to its balance sheet as of
December 31, 2004, was impacted by the merger of Old Lottomatica and FinEuroGames S.p.A. into
NewGames S.p.A. in December 2005. Drivers of the material changes in each specific balance sheet
category are described below.
Receivables from customers increased by A53.6 million, from A58.8 million to A112.4 million, reflecting
increases in receivables from bet collection points of sale, from points of sale for electronic top-up services
for transactions processed at the end of the year, operating contributions due to Consorzio Lotterie
Nazionali for distribution and sale activities relating to instant and traditional lotteries and amounts to be
paid in connection with the Gaming Machine business.
Receivables from Others increased by A76.3 million, from A113.5 million to A189.8 million, reflecting
increased receivables for electronic top-up services for Telecom Italia Mobile processed at the end of 2005
and an increase in receivables from Instant and Traditional Lotteries points of sale in respect of tickets sold
during the year but for which the fees owing to Lottomatica have not been paid.
Inventories increased by A4.0 million at year-end 2005 compared with 2004, primarily due to an
increase in inventories of activation codes for electronic top-up services for Vodafone and Telecom Italia
Mobile and an increase in inventories for Lotto tickets.
Goodwill increased by A217.0 million primarily because of the merger of Old Lottomatica,
FinEuroGames S.p.A. and NewGames S.p.A. completed in December 2005.
108
Other intangible assets decreased from A11.7 million as of December 31, 2004 to A10.7 million as at
December 31, 2005. Other intangible assets include costs related to the acquisition and development of
software, costs incurred in connection with the acquisition of licenses and fixed assets under development.
Property, plant and equipment increased by A40.8 million to A158.2 million primarily due to a
A26.8 million increase in fixed assets under construction relating to terminals and printers that have not yet
been installed at points of sale.
Trade payables increased from A179.9 million as of December 31, 2004 to A305.0 million as of
December 31, 2005 primarily due to a reclassification of intra-group liabilities for tax planning purposes,
which for the prior period were classified as other liabilities, and an increase in payables in respect of
Lottomatica’s Instant and Traditional Lotteries business and electronic top-up services.
Potential Commitments and Capital Expenditures
As of December 31, 2005, Lottomatica’s contractual obligations and payments due by period, are as
follows:
Contractual Obligations
Long-term debt obligations . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . .
Other long-term liabilities reflected on the
balance sheet under IFRS . . . . . . . . . . . . . . .
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
2007
162
742
—
484
(100)
(27)
E 804
E 457
2008
2009
2010
Total
360,000
261
—
170
—
522
360,162
2,179
85
181
124
263
E 360,346
E 351
E 646
E 362,604
Long-term Debt. Lottomatica issued A360.0 million 4.80% Senior Notes due 2008 in December 2003.
The notes are repayable at their principal amount on December 22, 2008 and bear an annual coupon of
4.80%.
Operating Leases. Operating leases are used primarily by PCC GS S.p.A. to finance equipment and
by Totobit to finance its office building acquisition.
Other Long-Term Liabilities. Other Long-Term Liabilities are unrealised losses arising on
mark-to-market valuations of Lottomatica’s foreign exchange derivative instruments.
Commitments
Lottomatica and its subsidiaries are required, in certain circumstances, to ensure guarantees are
issued in favour of counterparties, primarily AAMS, mobile telephone providers or the Italian tax
authority. These guarantees secure the payment obligations of the relevant subsidiaries of Lottomatica.
For example, whenever the AAMS issues a concession, it requires that the concessionaire provide a bank
guarantee, indemnifying AAMS in the event that the concessionaire fails to properly perform its
obligations under the concession. In addition, AAMS also required Lottomatica to provide a bank
guarantee in respect of Lottomatica’s operation of Gaming Machines and Sports Betting, indemnifying
AAMS if the concessionaire fails to properly perform its obligations. Lottomatica’s guarantee in favour of
AAMS is due to expire at the end of the concession.
For electronic top-up services, the tobacconists and other points of sale that provide this service
transmit the electronic top-up sale amount to Lottomatica and Lottomatica retains these monies for an
average of 15 to 20 days before wiring the monies to the mobile telephone company net of Lottomatica’s
fee for providing the top-up service. Under the terms of the agreements with these mobile telephone
companies, Lottomatica is required to provide a bank guarantee in favour of the mobile telephone
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‘‘Enforcement Event’’ has the meaning given to it in Condition 9.1.
‘‘Equity Funded Deferred Interest’’ has the meaning given to it in Condition 4.3.
‘‘Equity Funded Deferred Interest Payment Date’’ has the meaning given to it in Condition 5.2(ii).
‘‘ESOP Cashflow’’ means the cash amount, in euros, if any, received by the Issuer or any member of the
Issuer Group in respect of the exercise of stock options by employees in respect of the annual financial
period ending on the date of the relevant Audited Accounts, as determined in accordance with such
Audited Accounts.
‘‘EURIBOR’’ has the meaning given to it in Condition 3.3(a).
‘‘Euro-zone’’ means the region comprised of Member States of the European Union that adopt or have
adopted the single currency in accordance with the Treaty establishing the European Community, as
amended by the Treaty on the European Union.
‘‘Euroclear’’ has the meaning given to it in Condition 1.
‘‘Fixed Interest Rate’’ has the meaning given to it in Condition 3.1.
‘‘Fixed Rate Interest Amount’’ has the meaning given to it in Condition 3.1.
‘‘Fixed Rate Interest Period’’ has the meaning given to it in Condition 3.1.
‘‘Fixed Rate Payment Date’’ has the meaning given to it in Condition 3.1.
‘‘Floating Interest Rate’’ has the meaning given to it in Condition 3.2.
‘‘Floating Rate Interest Amount’’ has the meaning given to it in Condition 3.2.
‘‘Floating Rate Interest Period’’ has the meaning given to it in Condition 3.2.
‘‘Floating Rate Payment Date’’ has the meaning given to it in Condition 3.2.
‘‘Free Cash-flow Before Debt Service’’ means EBITDA plus ESOP Cashflow less Capital Expenditure less
Taxes Paid, in each case in respect of the annual financial period ending on the date of the relevant
Audited Accounts.
‘‘Global Certificates’’ has the meaning given to it in Condition 1.
‘‘IFRS’’ means the International Financial Reporting Standards issued by the International
Accounting Standards Board, as from time to time adopted by the European Commission for use in the
European Union.
‘‘Insolvency Law’’ means Royal Decree No. 267 of March 16, 1942, as amended and supplemented from
time to time.
‘‘Insolvency Proceedings’’ means any insolvency proceedings or proceedings equivalent or analogous
thereto including, but not limited to, temporary extraordinary administration (gestione provvisoria),
bankruptcy (fallimento), arrangement with creditors (concordato preventivo), adjustment of creditors’
claims (concordato fallimentare), controlled administration (amministrazione controllata), forced
administrative liquidation (liquidazione coatta amministrativa), extraordinary administration
(amministrazione straordinaria) and extraordinary administration of large companies in insolvency
(amministrazione straordinaria delle grandi imprese in stato di insolvenza), as set out in the Insolvency Law
and/or any other applicable law.
‘‘Interest Determination Date’’ has the meaning given to it in Condition 3.3(a).
‘‘Interest Expense’’ means the amount of (a) the expense relating to interest and amounts in the nature of
interest, discount, acceptance and commitment fees, amounts payable under interest rate hedging
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Financial Risk Management and Dividend Policy
Financial Risk Management
The principal market risk inherent in Lottomatica’s financial instruments and exposures is the
potential loss arising from adverse changes in foreign exchange rates. Lottomatica does not consider its
exposure to commodity price changes and interest rate changes to be material. In order to manage its
foreign exchange risks which relate to invoices from Scientific Games denominated in U.S. dollars for the
special paper used to manufacture scratch cards for Instant Lottery games, Lottomatica enters into and
reviews, from time to time, foreign exchange hedging instruments to hedge approximately 50% of the risk
based on the future supplies up the termination of the concession for Instant and Traditional Lotteries held
by Consorzio Lotterie Nazionali.
As of December 31, 2005, a hypothetical 10% adverse change in the A/$exchange rates would result in
a potential loss of future earnings and a cash outflow of approximately A4.3 million.
As of December 31, 2005, Lottomatica had contracts for the purchase of U.S. dollars of approximately
U.S.$40.5 million.
Liquidity Policy
During 2004 Lottomatica commenced operating a cash-flow investment policy designed to maximise a
fair rate of return on amounts invested and to ensure that the proceeds from investments are consistent
with Lottomatica’s cash-flow needs, both in terms of amount and the ease with which such investments
could be realised at short notice. Currently, the maturity dates of these investments is limited to up to
12 months for corporate instruments and up to 18 months for government securities. The policy permits
rated instruments only, with a minimum rating of P-2/A-2/F-2, A3/A-/A-. In addition, the policy includes
strict guidelines to ensure that the maximum exposure to a single issuer is limited (currently 20% of the
aggregate amounts invested by Lottomatica) and the maximum percentage of a particular issuance of
securities by an issuer is limited (currently 5% on the same basis). In respect of non-negotiable
instruments, such as bank deposits, the policy includes strict guidelines as to countries in which investments
are permitted and the rating of the relevant banking institution.
Dividend Policy
Lottomatica is committed to return cash to its shareholders. During the period from 2003 through
2005 Lottomatica has distributed dividends to Lottomatica’s shareholders of approximately A448.3 million.
In addition, on April 24, 2006, Lottomatica’s started to pay the dividends declared on April 12, 2006 for a
total amount of A119.4 million. Lottomatica plans to continue distributing dividends in the future, although
there can be no assurance that it will do so. The Senior Credit Facilities Agreement provides for certain
restrictions on the payment of dividends. See ‘‘Description of Certain Indebtedness—Senior Credit
Facilities’’.
Subsequent Events
On January 10, 2006, Lottomatica and GTECH announced that they had entered into an agreement
pursuant to which Lottomatica will acquire GTECH for U.S.$35.00 in cash for each outstanding share of
existing debt. Completion of the transaction is subject to receipt of financing, approval by GTECH
shareholders, regulatory approvals, receipt of contract assignment assurance from certain significant
lottery customers, Lottomatica maintaining a pro forma investment grade corporate credit rating, and
other customary conditions. See ‘‘The Transactions’’.
On April 27, 2006, Lottomatica announced its unaudited interim consolidated financial results for the
three-month period ended March 31, 2006. Lottomatica’s unaudited interim consolidated financial
statements as of and for the three-month period ended March 31, 2006 are included as Appendix B to this
Offering Circular.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS—GTECH
Introduction
Overview
The following Management’s Discussion and Analysis, or MD&A, is intended to help the reader
understand the financial results of GTECH Holdings Corporation (‘‘GTECH’’). MD&A is provided as a
supplement to, and should be read in conjunction with, GTECH’s financial statements and the
accompanying notes.
The discussion that follows assumes that GTECH continues to operate on a stand alone basis and does
not reflect the potential impact of the proposed Acquisition.
This overview provides guidance on the individual sections of MD&A as follows:
• Forward-Looking Statements—cautionary information about forward-looking statements.
• Potential Change in Control of GTECH—a description of the potential change in control of GTECH.
• GTECH’s Business—a general description of GTECH’s business; GTECH’s growth strategy and
Brazil matters.
• Common Stock Split—information about GTECH’s prior year common stock split.
• New Accounting Pronouncements—a summary of accounting pronouncements that GTECH has not
yet adopted due to a delayed effective date.
• Application of Critical Accounting Policies—a discussion of accounting policies that GTECH
believes are both most critical to its financial condition and results of operations, and requires
management’s most difficult, subjective or complex judgments and estimates.
• Operations Review—an analysis of GTECH’s consolidated results of operations for the three years
presented in its financial statements. GTECH operates in one business—Transaction Processing,
and it has a single operating and reportable business segment. Therefore, GTECH’s discussions are
not quantified by segment results.
• Liquidity, Capital Resources and Financial Position—an analysis of cash-flows, financial position,
contractual obligations and commitments.
• Financial Risk Management and Dividend Policy—information about financial risk management;
interest rate market risk; foreign currency exchange rate risk; and GTECH’s dividend policy.
Unless specified otherwise, the term ‘‘GTECH’’ is used in this MD&A to refer to GTECH Holdings
Corporation and its consolidated subsidiaries included in the consolidated financial statements.
Forward-Looking Statements
Statements contained in this section and elsewhere in this report which are not historical statements
constitute ‘‘forward-looking statements’’ within the meaning of Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934. Generally, the words ‘‘believe,’’ ‘‘expect,’’ ‘‘estimate,’’
‘‘anticipate,’’ ‘‘will,’’ ‘‘may,’’ ‘‘could,’’ ‘‘plan,’’ ‘‘continue’’ and similar expressions identify forward looking
statements. See ‘‘Forward-Looking Statements’’.
Potential Change in Control of GTECH
On January 10, 2006, GTECH entered into an agreement and plan of merger with Lottomatica,
whereby Lottomatica would acquire GTECH for U.S.$35.00 in cash per outstanding GTECH share. The
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total value of the transaction is estimated to be approximately U.S.$4.8 billion, including the assumption of
GTECH’s existing net debt. In connection with the transaction (as currently contemplated), GTECH
expects to incur approximately U.S.$19 million to U.S.$21 million of transaction costs from the close of
fiscal 2006 through the closing of the transaction, of which approximately U.S.$12 million to
U.S.$14 million are contingent upon completion of the transaction. These costs are subject to change
based on changes in terms of the transaction.
Completion of the transaction, which is expected to occur in mid-2006, is subject to receipt of
financing, approval by GTECH’s shareholders, regulatory approvals, receipt of contract assignment
assurance from certain significant lottery customers, Lottomatica maintaining a pro forma investment
grade corporate credit rating, and other customary conditions. Subsequent to the Acquisition, GTECH’s
shares will be delisted on the New York Stock Exchange.
GTECH’s Business
Overview
GTECH operates on a 52-week or 53-week fiscal year ending on the last Saturday in February and
fiscal 2006 was a 52-week year that ended on February 25, 2006. Fiscal 2005 was also a 52-week year. Fiscal
2004 was a 53-week year and GTECH included the extra week in its fourth quarter ended February 28,
2004.
GTECH is a global gaming and technology company providing software, networks and professional
services that power high-performance, transaction processing systems. GTECH is the world’s leading
operator of highly-secure on-line lottery transaction processing systems, doing business in 51 countries
worldwide and GTECH has a growing presence in commercial gaming technology (‘‘Gaming solutions’’)
and financial services transaction processing (‘‘Commercial services’’). To date, the majority of GTECH’s
Gaming solutions revenues have been product sale driven. A comparison of GTECH’s revenue
concentration is as follows:
Consolidated Revenues
2006
Lottery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gaming solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84%
9%
7%
Fiscal
2005
87%
7%
6%
2004
91%
7%
2%
100% 100% 100%
Being a global business, GTECH derives a substantial portion of its revenue from its operations
outside of the United States. In fiscal 2006, GTECH derived 48.9% of its revenues from international
operations, including 11.4% of its revenues from its Brazilian operations alone (including 11.1% of its
revenues from Caixa Economica Federal, the operator of Brazil’s National Lottery, its largest customer in
fiscal 2006 based on annual revenues). In addition, substantial portions of GTECH’s assets, primarily
consisting of equipment it uses to operate on-line lottery systems for its customers, are held outside of the
United States. GTECH is also exposed to more general risks of international operations, including
increased governmental regulation of the on-line lottery industry in the markets where it operates;
exchange controls or other currency restrictions; and significant political instability.
GTECH’s service revenues are derived primarily from lottery service contracts, which are typically at
least five to seven years in duration for the base contract term with three to five years of extension options
resulting in total contract lives of eight to ten years. GTECH’s contracts generally provide compensation to
it based upon a percentage of a lottery’s gross on-line and instant ticket sales. These percentages vary
depending on the size of the lottery and the scope of services provided to the lottery. GTECH’s product
sale revenues are derived primarily from the installation of new on-line lottery systems, installation of new
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However, if there is an Enforcement Event under the Securities, each of Euroclear and Clearstream,
Luxembourg reserves the right to exchange the Global Certificates for definitive certificates in registered
form (‘‘Definitive Certificates’’), and to distribute such Definitive Certificates to their participants.
Transfers
Transfers between participants in Euroclear and Clearstream, Luxembourg will be done in accordance
with Euroclear and Clearstream, Luxembourg rules and will be settled in immediately available funds. If a
holder requires physical delivery of Definitive Certificates for any reason, including to sell the Securities to
persons in states which require physical delivery of such Securities or to pledge such Securities, such holder
must transfer its interests in the Global Certificates in accordance with the normal procedures of Euroclear
and Clearstream, Luxembourg and in accordance with the procedures set forth in the Paying Agency
Agreement.
The Restricted Global Certificate will bear a legend to the effect set forth in ‘‘Notice to Investors’’.
Book-Entry Interests in the Global Certificates will be subject to the restrictions on transfers and
certification requirements discussed in ‘‘Notice to U.S. Investors’’.
Restricted Book-Entry Interests may be transferred to a person who takes delivery in the form of
Unrestricted Book-Entry Interests only upon delivery by the transferor of a written certification (in the
form provided in the Paying Agency Agreement) to the effect that such transfer is being made in
accordance with Regulation S or Rule 144A under the U.S. Securities Act or any other exemption (if
available under the U.S. Securities Act). In connection with transfers involving an exchange of Restricted
Book-Entry Interests for Unrestricted Book-Entry Interests, appropriate adjustments will be made to
reflect a decrease in the principal amount of the Restricted Global Certificate and a corresponding
increase in the principal amount of the Unrestricted Global Certificate.
Unrestricted Book-Entry Interests may only be made to a person who takes delivery in the form of
Restricted Book-Entry Interests only upon delivery by the transferor of a written certification (in the form
provided in the Paying Agency Agreement) to the effect that such transfer is being made to a person who
the transferor reasonably believes is a ‘‘qualified institutional buyer’’ within the meaning of Rule 144A in a
transaction meeting the requirements of Rule 144A, or otherwise in accordance with the transfer
restrictions described under ‘‘Transfer Restrictions’’ and in accordance with any applicable securities laws
of any other jurisdiction. See ‘‘Notice to Investors’’. In connection with transfers involving an exchange of
Unrestricted Book-Entry Interests for Restricted Book-Entry Interests, appropriate adjustments will be
made to reflect a decrease in the principal amount of the Unrestricted Global Certificate and a
corresponding increase in the principal amount of the Restricted Global Certificate.
Any Book-Entry Interest in one of the Global Certificates that is transferred to a person who takes
delivery in the form of a Book-Entry Interest in the other Global Certificate will, upon transfer, cease to be
a Book-Entry Interest in the first-mentioned Global Certificate and become a Book-Entry Interest in the
other Global Certificate, and accordingly, will thereafter be subject to all transfer restrictions, if any, and
other procedures applicable to Book-Entry Interests in such other Global Certificate for as long as it
remains such a Book-Entry Interest.
Definitive Certificates
Under the terms of the Global Certificates, owners of Book-Entry Interests will receive Definitive
Certificates:
• if Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days
(other than by reason of holidays, statutory or otherwise) or announces an intention permanently to
cease business or does in fact do so;
300
machine games and customized solutions for dynamic gaming operations. GTECH expects this transaction
will close by December 2007.
In fiscal 2005 GTECH acquired one privately-held company, Billbird S.A. (‘‘BillBird’’), that
strengthened its growth strategy in Commercial Services.
GTECH’s Commercial Services market includes the processing and transmission of commercial,
non-lottery transactions including debit and credit card transactions (both acquiring and issuing
processing), bill payments, electronic tax payments, pre-paid utility payments and pre-paid cellular
telephone recharges. Currently, GTECH’s networks in Brazil, Poland, Chile, the Czech Republic, Jamaica
and other countries process debit and credit card transactions, bill payments and other commercial services
transactions. In the near term, GTECH expects to concentrate its efforts to grow commercial services
revenues principally in Central and Eastern Europe and other selected emerging economies, with the goal
of leveraging its existing technology, infrastructure and relationships to drive growth in Commercial
Services.
In addition, GTECH will continue to identify and evaluate a variety of selective opportunities for
acquisitions in the Lottery, Gaming Solutions, and Commercial Services markets, as well as investing in
growth through licensing when the right opportunities present themselves.
Brazil Matters
GTECH Brasil Ltda., GTECH’s Brazilian subsidiary (‘‘GTECH Brazil’’), has provided on-line lottery
services and technology to Caixa Economica Federal (‘‘CEF’’), the Brazilian bank and operator of Brazil’s
National Lottery since 1997. Revenues from GTECH Brazil’s contract with CEF accounted for 11.1% of
GTECH’s total fiscal 2006 revenues, making CEF GTECH’s largest customer in fiscal 2006 based upon
annual revenues.
In June 2004, a ruling (the ‘‘Ruling’’) in a civil action initiated by federal attorneys with Brazil’s Public
Ministry had the effect in fiscal 2005 of materially reducing payments that GTECH Brazil otherwise would
have received from its contract with CEF. The Ruling ordered that 30% of payments subsequent to the
date of the Ruling due to GTECH Brazil by CEF, be withheld and deposited in an account maintained by
the Court. As of February 26, 2005, the total amount withheld and deposited pursuant to the Ruling was
approximately 68 million Brazilian reals, or U.S.$26 million. In fiscal 2005, GTECH did not recognise
service revenues for the payments that were withheld from GTECH Brazil, as realisation of these amounts
was not reasonably assured.
In July 2004, GTECH Brazil filed an appeal of the Ruling and in March 2005, an appellate court
decision ordered that the withholding be discontinued and that all funds currently held in escrow in excess
of 40 million Brazilian reals be returned to GTECH Brazil, which amounted to U.S.$11 million of the
U.S.$26 million withheld as of February 26, 2005. GTECH received and recognised these funds as service
revenue on April 13, 2005. The Ruling also put in place certain restrictions on the transfer or sale of
certain of GTECH’s Brazilian assets. Such restrictions were lifted in March 2005.
The civil action initiated by federal attorneys with Brazil’s Public Ministry also seeks to impose
damages equal to the sum of all amounts paid to GTECH Brazil under contracts that it entered into with
CEF in 1997 (the ‘‘1997 Contract’’) and 2000 (the ‘‘2000 Contract’’), respectively, and certain other
permitted amounts, minus its proven investment costs. The applicable statute under which this action was
brought also permits the assessment of interest and, in the discretion of the court, penalties of up to three
times the amount of the damages imposed. GTECH estimates that through the date of the lawsuit it
received under the 1997 Contract and the 2000 Contract a total of approximately 1.5 billion Brazilian reals
(or approximately 702 million United States dollars at currency exchange rates in effect as of February 25,
2006). In addition, although it is unclear how investment costs would be determined for purposes of this
lawsuit, GTECH estimates that its investment costs through the date of the lawsuit were approximately
115
between 1.2 billion and 1.4 billion Brazilian reals (or approximately between 562 million and 656 million
United States dollars) at currency exchange rates in effect as of February 25, 2006 in aggregate; however,
these investment costs could be disputed by CEF, and are ultimately subject to approval by the court.
In May 2005, GTECH Brazil entered into a new one-year contract with CEF, which expires in
May 2006. While CEF has the right to extend the term of this contract, a preliminary report issued in
January 2006 by a special investigating panel of the Brazilian congress recommended, among other things,
that CEF’s contract with GTECH Brazil not be extended past its May 2006 expiration date. In addition,
CEF has announced its intention to develop a central in-house system to replace the services provided by
GTECH Brazil under its contract with CEF. Therefore, GTECH does not anticipate that its contract with
CEF will be extended on a long-term basis, if at all.
Accumulated foreign currency translation losses related to GTECH’s operations in Brazil of
U.S.$48.4 million (which are recorded in Accumulated Other Comprehensive Loss in GTECH’s
Consolidated Balance Sheet at February 25, 2006), would be recorded as a charge to GTECH’s
consolidated income statement upon the expiration of its contract with CEF should it determine that the
expiration of the CEF contract results in a substantial liquidation of its investment in Brazil.
See ‘‘Business—GTECH—Legal Proceedings—Brazilian Legal Proceedings’’, and Note 15 to the
consolidated financial statements for detailed disclosures regarding this matter.
Common Stock Split
In the second quarter of fiscal 2005, GTECH’s Board of Directors approved a 2-for-1 common stock
split, payable in the form of a stock dividend, which entitled each shareholder of record on July 1, 2004 to
receive one share of common stock for each outstanding share of common stock held on that date. The
stock dividend was distributed on July 30, 2004. All references to common shares and per share amounts
herein have been restated to reflect the stock split for all periods presented.
New Accounting Pronouncements
FASB Statement No. 123R
In December 2004, the Financial Accounting Standards Board (‘‘FASB’’) issued Statement of
Financial Accounting Standards No. 123 (revised 2004), ‘‘Share-Based Payment’’ (‘‘SFAS 123R’’), which is
a revision of FASB Statement No. 123, ‘‘Accounting for Stock-Based Compensation’’. SFAS 123R
supersedes Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’
(‘‘APB 25’’), and amends FASB Statement No. 95, ‘‘Statement of Cash-flows’’. SFAS 123R requires all sharebased payments to employees, including grants of employee stock options, be recognised in the financial
statements based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123R must be
adopted no later than the beginning of the first fiscal year beginning after June 15, 2005 (GTECH’s fiscal
2007 first quarter). Early adoption is permitted. GTECH plans to adopt SFAS 123R on the first day of
fiscal 2007 (February 26, 2006).
SFAS 123R permits public companies to adopt its requirements using either the modified prospective
transition (‘‘MPT’’) method or the modified retrospective transition (‘‘MRT’’) method. Under the MPT
method, compensation cost for new awards and modified awards are recognised beginning with the
effective date and the cost for awards that were granted prior to, but not vested as of the effective date, will
be based on the grant date fair value estimate used for SFAS 123 pro forma disclosure purposes. The MRT
method includes the requirements of the MPT method but also permits restatement of all prior periods
presented or only the prior interim periods of the year of adoption. GTECH plans to adopt SFAS 123R
using the MPT method and GTECH intends to use a lattice model to value stock options granted on or
after February 26, 2006.
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GTECH currently accounts for share-based payments to employees using the intrinsic value method
under APB 25 and related Interpretations, and therefore it generally recognises no compensation cost for
employee stock options. GTECH currently estimates the impact of adopting SFAS 123R will be in a range
of U.S.$0.04 to U.S.$0.06 per diluted share in fiscal 2007 assuming a certain level of awards. Variation to
the assumed level of awards and other factors could result in a different amount. SFAS 123R also requires
the benefits of tax deductions in excess of recognised compensation cost to be reported as a financing
cash-flow, rather than as an operating cash-flow as required under current literature. This requirement will
reduce net operating cash-flows and increase net financing cash-flows in periods after adoption. While
GTECH cannot estimate what those amounts will be in the future (because they depend on, among other
things, when employees exercise stock options), the amount of operating cash-flows recognised in prior
periods for these excess tax deductions were U.S.$6.7 million, U.S.$11.3 million, and U.S.$10.4 million in
fiscal 2006, 2005 and 2004, respectively.
SEC Staff Accounting Bulletin No. 107
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (‘‘SAB No. 107’’), ‘‘Share-Based
Payment, to provide interpretive guidance on SFAS 123R valuation methods, assumptions used in
valuation models, and the interaction of SFAS No. 123R with existing SEC guidance. SAB No. 107 also
requires the classification of stock compensation expense in the same financial statement line as cash
compensation, and will therefore impact GTECH’s service and product gross margins as well as its selling,
general and administrative and research and development expenses.
Application of Critical Accounting Policies
GTECH has identified the accounting policies listed below that it believes are both most critical to its
financial condition and results of operations, and require management’s most difficult, subjective or
complex judgments in estimating the effect of inherent uncertainties. This section should be read in
conjunction with Note 1 to the consolidated financial statements, which includes other significant
accounting policies.
Revenue Recognition
Lottery and Gaming Transaction Processing Services
GTECH generally conducts its lottery and gaming business under two types of contractual
arrangements: Facilities Management Contracts and Product Sales Contracts.
Facilities Management Contracts
A majority of GTECH’s revenues are derived from facilities management contracts, under which it
constructs, installs, operates and retains ownership of the on-line lottery system (‘‘lottery system’’). These
contracts generally provide for a variable amount of monthly or weekly service fees paid to GTECH
directly from the lottery authority based on a percentage of a lottery’s gross on-line and instant ticket sales
or a percentage of net machine income. These fees are recognised as revenue in the period earned and are
classified as Service Revenue in GTECH’s Consolidated Income Statements when all of the following
criteria are met:
• persuasive evidence of an arrangement exists, which is typically when a customer contract has been
signed;
• services have been rendered;
• GTECH’s fee is deemed to be fixed or determinable and free of contingencies or significant
uncertainties; and
• collectibility is reasonably assured.
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In instances where customer acceptance of the product or system is required, revenue is deferred until
all the acceptance criteria have been met.
Product Sales Contracts
Under product sales contracts, GTECH constructs, sells, delivers and installs a turnkey lottery system
or delivers lottery equipment, and licenses the computer software for a fixed price, and the lottery
authority subsequently operates the lottery system. Product sale contracts generally include customer
acceptance provisions and general customer rights to terminate the contract if GTECH is in breach of the
contract.
Because product sales contracts include significant customisation, modification and other services
prior to customer acceptance that are considered essential to the lottery software inherent in GTECH’s
lottery systems, revenue is recognised using contract accounting. Under contract accounting, amounts due
to GTECH, and costs incurred by it in constructing the lottery system, prior to customer acceptance, are
deferred. Revenue attributable to the lottery system is classified as Sales of Products in GTECH’s
Consolidated Income Statements and is recognised upon customer acceptance as long as there are no
substantial doubts regarding collectibility.
Whenever GTECH enters into a product sale contract that involves the delivery or performance of
multiple products and services that include the development and customisation of software,
implementation services, and licensed software and support services, GTECH applies the consensus of
EITF 00-21 ‘‘Revenue Arrangements with Multiple Deliverables’’, to determine whether the
non-customisation related deliverables specified in the contract that are not directly related to its
technology, should be treated as separate units of accounting for revenue recognition purposes. If the
elements qualify as separate units of accounting, and fair value exists for the elements of the contract that
are unrelated to the customisation services, these elements are accounted for separately, and the related
revenue is recognised as the products are delivered or the services are rendered.
The application of revenue recognition principles requires judgment, including whether GTECH’s
product sales contracts include multiple elements, and if so, whether fair value exists for those elements.
As a result, contract interpretation is sometimes required to determine the appropriate accounting,
including whether the deliverables in a multiple element arrangement should be treated as separate units
of accounting for revenue recognition purposes, and if so, the relative fair value that should be allocated to
each of the elements and when to recognise revenue for each element. GTECH’s interpretation would not
affect the amount of revenue recognised but could impact the timing of revenue recognition.
Revenues attributable to any ongoing services provided subsequent to customer acceptance are
classified as Service Revenue in GTECH’s Consolidated Income Statements in the period earned.
In certain product sale contracts (primarily the stand alone sale of lottery or video lottery terminals
and software deliverables that do not involve significant customisation of software), GTECH is not
responsible for installation. In these cases, GTECH recognises revenue when all of the following criteria
are met:
• persuasive evidence of an arrangement exists, which is typically when a customer contract has been
signed;
• the product has been delivered;
• GTECH’s fee is deemed to be fixed or determinable and free of contingencies or significant
uncertainties; and
• collectibility is reasonably assured.
118
Italian Inheritance and Gift Tax
According to Law No. 383 of October 18, 2001 (‘‘Law No. 383’’), Italian inheritance and gift tax,
previously generally payable on transfer of securities on death or by gift, was abolished as of October 25,
2001.
However, according to the current literal interpretation of Law No. 333, for donees other than
spouses, direct descendants or ancestors and other relatives within the fourth degree, if and to the extent
that the value of the gift to any such donee exceeds A180,759.91, the gift of Securities may be subject to the
ordinary transfer taxes that would apply if the Securities had been transferred for consideration. In this
respect, the Italian Tax authorities have expressed the view that the transfer tax described in paragraph—
Transfer Tax—below (tassa sui contratti di borsa) should not be considered as a ‘‘transfer tax ordinarily
applicable’’ to transfers for consideration.
Moreover, an anti-avoidance rule is provided by Law No. 383 for any gift of assets (such as Securities)
which, if sold for consideration, would give rise to capital gains subject to Italian imposta sostitutiva on
capital gains. In particular, if the donee sells Securities for consideration within five years from the receipt
thereof as a gift, the donee will be required to pay the relevant Italian imposta sostitutiva on capital gains,
where applicable, as if the gift had never taken place.
Transfer Tax
Italian Legislative Decree No. 435 of November 21, 1997 (‘‘Decree No. 435’’), which partly amended
the regime set forth by Royal Decree No. 3278 of December 30, 1923, governs the application of Italian
transfer tax on the transfer of securities (so-called tassa sui contratti di borsa), with Italian transfer tax being
in general applicable as follows in relation to transfers of Securities executed in the Republic of Italy:
(i) A0.0083 for every A51.65 (or fraction thereof) of the price at which the Securities are transferred,
when the transfer is effected between private subjects directly or through an intermediary other
than a bank or other authorised intermediaries governed by Legislative Decree No. 451 of
July 23, 1996, as superseded by the Italian Finance Act, or stockbroker (the ‘‘Qualified
Intermediaries’’);
(ii) A0.00465 for every A51.65 (or fraction thereof) of the price at which the Securities are transferred,
when the transfer is effected (i) between private subjects and Qualified Intermediaries, or
(ii) between private subjects through Qualified Intermediaries; and
(iii) A0.00465 for every A51.65 (or fraction thereof) of the price at which the Securities are transferred,
when the transfer is effected between Qualified Intermediaries.
However, in the cases indicated above under (ii) and (iii), the amount of applicable transfer tax may
not exceed A929.62 for each transaction.
The transfer tax does not apply, inter alia, to: (i) contracts entered into on regulated markets (e.g. the
Luxebourg Stock Exchange) relating to the transfer of securities, including contracts between the
intermediary and its principal or between Qualified Intermediaries, or (ii) off-market transactions
regarding securities listed on regulated markets, provided that the contracts are entered into: (a) between
Qualified Intermediaries, (b) between Qualified Intermediaries, on the one hand, and non-Italian
residents, on the other hand, or (c) between Qualified Intermediaries, even if non-resident in the Republic
of Italy, on the one hand, and undertakings for collective investment of saving income, on the other hand;
(iii) contracts related to sales of securities occurring in the context of a public sale offering (offerta pubblica
di vendita) aimed at a listing on regulated markets, or involving financial instruments already listed on
regulated markets; and (iv) contracts regarding securities not listed on a regulated market entered into
between Qualified Intermediaries, on the one hand, and non-Italian residents, on the other hand.
For transfer tax purposes, transfers of securities to or by Italian residents are presumed to be executed
in the Republic of Italy. Moreover, contracts for the transfer of Securities executed outside the Republic of
Italy between non-Italian residents will have legal effect (efficacia giuridica) in the Republic of Italy to the
extent that transfer tax is paid.
309
EU Savings Tax Directive
Under EC Council Directive 2003/48/EC on the taxation of savings income (the ‘‘EU Savings
Directive’’), EU member states are required from July 1, 2005 to provide to the tax authorities of another
member state details of payments of interest (or similar income) made by a person within its jurisdiction to
an individual resident in that other member state. However, for a transitional period, Belgium,
Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a
withholding system in relation to such payments (the ending of such transitional period being dependent
upon the conclusion of certain other agreements relating to information exchange with certain other
countries). A number of non-EU countries and territories, including, inter alia, Switzerland, have agreed to
adopt similar measures (which will be a withholding system in the case of Switzerland) with effect from the
same date.
Implementation in the Republic of Italy of the EU Savings Directive
The Republic of Italy has implemented the EU Savings Directive through Legislative Decree No. 84
of April 18, 2005 (‘‘Decree No. 84’’). Under Decree No. 84, subject to a number of important conditions
being met, in the case of interest paid starting from July 1, 2005 to individuals who qualify as beneficial
owners of the interest payment and are resident for tax purposes in another EU member state, Italian
qualified paying agents shall report to the Italian Tax Authorities details of the relevant payments and
personal information on the individual beneficial owner. Such information is transmitted by the Italian Tax
Authorities to the competent foreign tax authorities of the State of residence of the beneficial owner.
Certain United States Federal Income Tax Considerations for U.S. Holders
NOTICE PURSUANT TO U.S. TREASURY DEPARTMENT CIRCULAR 230: THE DISCUSSION
UNDER THIS HEADING ‘‘Certain United States Federal Income Tax Considerations for U.S. Holders’’
IS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, FOR THE
PURPOSE OF AVOIDING TAX PENALTIES THAT MAY BE IMPOSED UNDER U.S. TAX LAWS.
THE DISCUSSION WAS WRITTEN IN CONNECTION WITH THE PROMOTION OR
MARKETING OF THE SECURITIES ADDRESSED HEREIN. EACH TAXPAYER SHOULD SEEK
ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN
INDEPENDENT TAX ADVISOR.
The following discussion is a summary of certain material U.S. federal income tax consequences of the
purchase, ownership and disposition of Securities by a U.S. Holder (defined below), but does not purport
to be a complete analysis of all potential tax considerations relevant to a decision to purchase Securities.
This summary is based upon the Code, U.S. Treasury regulations issued thereunder, and judicial and
administrative interpretations thereof, each as in effect on the date hereof, and all of which are subject to
change, possibly with retroactive effect. This discussion does not address all of the U.S. federal income tax
consequences that may be relevant to a U.S. Holder in light of such holder’s particular circumstances or
the U.S. federal income tax consequences to U.S. Holders subject to special rules, such as certain financial
institutions, insurance companies, dealers in securities or currencies, traders in securities, U.S. Holders
whose functional currency is not the U.S. dollar, persons owning (directly, indirectly or constructively) 10%
or more of the Issuer’s outstanding shares, persons that are residents of the Republic of Italy for Italian tax
purposes or that conduct a business or have a permanent establishment in the Republic of Italy,
tax-exempt organisations, regulated investment companies, real estate investment trusts, partnerships or
other pass-through entities, persons liable for alternative minimum tax, and persons holding the Securities
as part of a ‘‘straddle,’’ ‘‘hedge,’’ ‘‘conversion transaction’’ or other integrated transaction, all of whom may
be subject to U.S. federal income tax rules that differ significantly from those summarised below. In
addition, this summary does not discuss any state, local, or non-U.S. tax considerations, or any U.S. federal
tax considerations other than income tax considerations (for example, U.S. federal estate or gift tax
310
GTECH’s long-lived assets may be impaired, the estimated future undiscounted cash-flows associated with
these long-lived assets would be compared to their carrying amounts to determine if a write-down to fair
value is necessary.
Operations Review
Refer to the Summary Financial Data table while reading the operations review below:
SUMMARY FINANCIAL DATA
Fiscal Year Ended
February 26,
2005
(in thousands of U.S. dollars)
February 25,
2006
February 28,
2004
Revenues:
Services . . . . . . . . . . . . . . . . . . .
Sales of products . . . . . . . . . . . .
$ 1,122,668
182,138
Total . . . . . . . . . . . . . . . . . . .
1,304,806
100.0
1,257,235
100.0
1,051,330
100.0
Costs and expenses:
Costs of services(a) . . . . . . . . . .
Costs of sales(a) . . . . . . . . . . . . .
674,528
104,037
60.1
57.1
616,633
157,974
60.6
65.9
537,839
59,226
56.2
63.1
Total . . . . . . . . . . . . . . . . . . .
778,565
59.7
774,607
61.6
597,065
56.8
Gross profit . . . . . . . . . . . . . . . . .
526,241
40.3
482,628
38.4
454,265
43.2
Selling, general and administrative .
Research and development . . . . . . .
135,715
49,869
10.4
3.8
117,253
52,559
9.3
4.2
109,092
57,318
10.4
5.4
Operating expenses . . . . . . . . . .
185,584
14.2
169,812
13.5
166,410
15.8
Operating income . . . . . . . . . . . . .
340,657
26.1
312,816
24.9
287,855
27.4
.......
10,912
0.8
4,615
0.4
5,733
0.5
.......
.......
.......
1,941
(4,341)
(30,793)
0.1
(0.3)
(2.4)
2,812
5,356
(19,213)
0.2
0.4
(1.5)
6,236
1,889
(10,919)
0.6
0.2
(1.0)
(22,281)
(1.7)
(6,430)
(0.5)
2,939
0.3
Income before income taxes . . . . . .
318,376
24.4
306,386
24.4
290,794
27.7
Income taxes . . . . . . . . . . . . . . . . .
107,331
8.2
109,992
8.8
107,594
10.3
183,200
17.4%
Other income (expense):
Interest income . . . . . .
Equity in earnings of
unconsolidated affiliates
Other income (expense)
Interest expense . . . . . .
Net income . . . . . . . . . . . . . . . . . .
$
86.0% $ 1,017,683
14.0
239,552
211,045
16.2% $
196,394
80.9% $
19.1
15.6% $
(a) Percentages are computed based on cost as a percentage of related revenue.
121
957,471
93,859
91.1%
8.9
Comparison of Fiscal 2006 with 2005
Revenues and Gross Margin
Fiscal Year Ended
Change
February 25,
February 26,
2006
2005
$
%
Domestic lottery . . .
International lottery
Commercial services
Gaming solutions . .
All other . . . . . . . .
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$ 580.5
392.2
115.9
34.1
—
$ 520.6
381.9
84.8
27.4
3.0
$ 59.9
11.5
10.3
2.7
31.1
36.7
6.7
24.4
(3.0) (100.0)
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,122.7
182.1
$1,017.7
239.5
$105.0
(57.4)
10.3
(24.0)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,304.8
$1,257.2
$ 47.6
3.8
Fiscal Year Ended
February 25,
2006
Service gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39.9%
42.9%
February 26,
2005
39.4%
34.1%
Change
Percentage Points
0.5
8.8
The principal drivers of the 11.5% increase in domestic lottery service revenues were higher revenues
from an increase in sales by GTECH’s domestic lottery customers of approximately 4%, net contract wins
of approximately 3% (including the impact of GTECH’s new service contract in Florida and the loss of the
Colorado contract), and the combined benefit of GTECH’s instant ticket vending machine contract in
Illinois and higher jackpot activity of approximately 4%.
The 2.7% increase in international lottery service revenues was primarily due to an increase in sales by
GTECH’s international lottery customers of approximately 6%, favourable foreign exchange rates of
approximately 5%, and higher revenues from Brazil of approximately 5% related to the combined impact
of the court ordered return of funds previously held in escrow and the cessation of withholding.
Contractual rate changes and lower revenues from the loss of the Puerto Rico contract combined to
partially offset these increases by approximately 13%.
The 36.7% increase in commercial transaction processing service revenues was primarily due to higher
revenues from Brazil of approximately 21% related to the combined impact of the court ordered return of
funds previously held in escrow and the cessation of withholding, favourable foreign exchange rates of
approximately 15%, and higher service revenues from an increase in transaction volumes by GTECH’s
commercial transaction processing customers of approximately 11%. These increases were partially offset
by contractual rate changes.
The principal drivers of the 24.4% increase in gaming solutions service revenues were service revenues
from GTECH’s new gaming contract in the Republic of Italy of approximately 11%, higher service
revenues from an increase in sales by GTECH’s gaming solutions customers of approximately 6%, and a
full year of service revenues from Spielo (versus ten months in the prior fiscal year) of 4%.
GTECH’s service margins were up 0.5 percentage points over last year primarily due to higher
margins from Brazil related to higher service revenues resulting from the court ordered return of funds
previously held in escrow, and higher jackpot activity, partially offset by the current year impact of higher
depreciation and amortisation related to the implementation of new contracts.
122
In connection with the Offering, Credit Suisse Securities (Europe) Limited as stabilising manager (or
any person acting for it) may over-allot (provided that the aggregate principal amount of Securities allotted
does not exceed 105% of the aggregate principal amount of the Securities) or effect transactions with the
view to supporting the market price of the Securities at a level higher than that which might otherwise
prevail. However, there can be no assurance that the stabilising manager (or any person acting on its
behalf) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which
adequate public disclosure of the terms of the offer of the Securities is made and, if begun, may be
discontinued at any time, but must end no later than 30 days after the Issue Date and 60 days after the date
of the allotment of the Securities. Such stabilising shall be in compliance with all applicable laws,
regulations and rules, including Regulation M under the Securities Act.
• Over-allotment involves sales in excess of the offering size, which creates a short position for the
Joint Lead Managers.
• Stabilising transactions permit bids to purchase the underlying security so long as the stabilising bids
do not exceed a specified maximum.
• Covering transactions involve purchases of the Securities in the open market after the distribution
has been completed in order to cover short positions.
• Penalty bids permit the Joint Lead Managers to reclaim a selling concession from a broker/dealer
when the Securities originally sold by such broker/dealer are purchased in a stabilising or covering
transaction to cover short positions.
In the ordinary course of the Joint Lead Managers’ respective businesses, the Joint Lead Managers
and their affiliates may, from time to time, engage in commercial and investment banking transactions with
the Issuer. Certain of the Joint Lead Managers are acting as underwriters in connection with Lottomatica’s
proposed Rights Offering (see ‘‘The Transactions—The Financing’’). In addition, in connection with
Lottomatica’s Senior Credit Facilities which were entered into on or about May 5, 2006 (see ‘‘Description
of Certain Indebtedness—Senior Credit Facilities’’), Credit Suisse International and Goldman Sachs
International are acting as term loan arrangers; Credit Suisse, London Branch and Goldman Sachs
International are acting as revolving facility arrangers and guarantee facility arrangers; Credit Suisse
International and Goldman Sachs International are acting as term loan bookrunners; Credit Suisse,
London Branch and Goldman Sachs International are acting as revolving facility bookrunners and
guarantee facility bookrunners; Credit Suisse International and Goldman Sachs Credit Partners L.P. are
acting as term loan underwriters and Credit Suisse, London Branch and Goldman Sachs Credit Partners
L.P. are acting as revolving facility underwriters and guarantee facility underwriters. In addition, Credit
Suisse International, Credit Suisse, London Branch and Goldman Sachs Credit Partners L.P. are original
lenders under the Senior Credit Facilities.
321
INDEPENDENT AUDITORS
The consolidated financial statements of Lottomatica as of and for the years ended December 31,
2003, 2004 and 2005 appearing in this Offering Circular have been audited by Reconta Ernst & Young
S.p.A., independent auditor, as stated in its reports appearing herein. Reconta Ernst & Young S.p.A. is
registered under no. 2 in the Special Register (Albo Speciale) maintained by CONSOB and set out at
Article 161 of the Italian Finance Act and under no. 70945 in the Register of Accountancy Auditors
(Registro dei Revisori Contabili), in compliance with the provisions of the Legislative Decree No. 88 of
January 27, 1992. Reconta Ernst & Young S.p.A., is also a member of ASSIREVI, the Italian association of
auditing firms. The address of Reconta Ernst & Young S.p.A. is Via G. D. Romagnosi 18/A, Rome, Italy,
00196. The consolidated financial statements of GTECH as of and for the years ended February 28, 2004,
February 26, 2005 and February 25, 2006 appearing in this Offering Circular have been audited by Ernst &
Young LLP, independent auditor, as stated in its reports appearing herein. Ernst & Young LLP is
registered with the Public Company Accounting Oversight Board. The address of Ernst & Young LLP is
200 Clarendon Street, Boston, MA 02116, USA. The consolidated financial statements of GTECH as of
and for the period ended December 31, 2005 prepared in accordance with IFRS appearing in this Offering
Circular have been audited by Ernst & Young LLP, independent auditors, as stated in its report appearing
herein.
LEGAL MATTERS
The validity of the Securities and certain other legal matters are being passed upon for Lottomatica by
Bonelli Erede Pappalardo, Milan, Italy, with respect to matters of Italian law. Certain legal matters will be
passed upon for Lottomatica by Dewey Ballantine LLP, New York and London, England with respect to
matters of United States and English law. Certain legal matters will be passed upon for the Initial
Purchasers by Shearman & Sterling LLP, Rome, Italy with respect to matters of United States and English
law and by Gianni, Origoni, Grippo & Partners, Rome, Italy with respect to matters under Italian law.
WHERE PROSPECTIVE SECURITYHOLDERS CAN FIND ADDITIONAL INFORMATION
Each purchaser of the Securities from a Manager will be furnished a copy of this Offering Circular
and any related supplements to this Offering Circular. In addition, this Offering Circular will be published
on the website of the Luxembourg Stock Exchange (www.bourse.lu). Each person receiving this Offering
Circular and any related supplements to this Offering Circular acknowledges that:
(1) such person has been afforded an opportunity to request from Lottomatica, and to review and
has received, all additional information considered by it to be necessary to verify the accuracy and
completeness of the information herein;
(2) such person has not relied on the Joint Lead Managers or any person affiliated with the Joint
Lead Managers in connection with its investigation of the accuracy of such information or its
investment decision; and
(3) except as provided pursuant to clause (1) above, no person has been authorised to give any
information or to make any representation concerning the Securities offered hereby other than
those contained herein and, if given or made, such other information or representation should
not be relied upon as having been authorised by either Lottomatica or the Joint Lead Managers.
For so long as any of the Securities remain outstanding and are ‘‘restricted securities’’ within the
meaning of Rule 144(a)(3) under the U.S. Securities Act, Lottomatica will, during any period in which it is
not subject to Section 13 or 15(d) under the U.S. Securities Exchange Act of 1934, as amended, nor exempt
from reporting thereunder pursuant to Rule 12g3-2(b), make available to any holder or beneficial holder
of a Security, or to any prospective purchaser of a Security designated by such holder or beneficial holder,
the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the U.S. Securities
322
LISTING AND GENERAL INFORMATION
Admission to Trading and Listing
Application will be made for the Securities to be admitted to the official list and to trading on the
regulated market of the Luxembourg Stock Exchange, in accordance with the rules and regulations of such
exchange. Lottomatica estimates that the total expenses related to the admission to trading of the
Securities will be approximately A14,000.
Luxembourg Listing Information
For so long as the Securities are listed on the Luxembourg Stock Exchange and the rules and
regulations of that exchange require, copies of the following documents may be inspected and obtained at
the specified office of the paying agent in Luxembourg during normal business hours on any weekday:
• the memorandum and articles of incorporation of Lottomatica;
• the consolidated financial statements of Lottomatica for fiscal years ended December 31, 2005,
2004 and 2003;
• the consolidated financial statements of Lottomatica for the three-month period ended March 31,
2006;
• the consolidated financial statements of GTECH for fiscal years ended February 25, 2006,
February 25, 2005 and February 28, 2004;
• the consolidated financial statements of GTECH for the period ended December 31, 2005;
• the Trust Deed;
• the Subscription Agreement;
• the Paying Agency Agreement; and
• the Intercreditor Deed.
Lottomatica has appointed J.P. Morgan Bank Luxembourg S.A. as Luxembourg listing agent, Paying
and Transfer Agent and Registrar and JP Morgan Chase Bank, N.A. Principal Paying and Transfer Agent
to make payments on, and in relation to transfers of, the Securities. Lottomatica reserves the right to vary
such appointments in accordance with the terms of the Trust Deed and the Paying Agency Agreement.
Lottomatica accepts responsibility for the information contained in this Offering Circular. To
Lottomatica’s best knowledge, except as otherwise noted, the information contained in this Offering
Circular is in accordance with the facts and does not omit anything likely to affect the import of this
Offering Circular. This Offering Circular may only be used for the purposes for which it has been
published.
Clearing Information
The Securities sold pursuant to Regulation S and the Securities sold pursuant to Rule 144A of the
U.S. Securities Act have been accepted for clearance through the facilities of Euroclear and Clearstream
under common codes 025409566 and 025409574, respectively. The international securities identification
number (‘‘ISIN’’) for the Securities sold pursuant to Regulation S is XS0254095663 and the ISIN for the
Securities sold pursuant to Rule 144A is XS0254095747.
The address for Euroclear is 1 Boulevard du Roi Albert II, 1210 Brussels, Belgium and the address of
Clearstream is 42 Avenue J.F. Kennedy, 1855 Luxembourg.
Legal Information
Lottomatica was incorporated as a società per azioni which was formed under the laws of the Republic
of Italy on May 25, 2004 and shall remain valid until December 31, 2070. This date was extended by a
resolution of an extraordinary shareholders’ meeting of Lottomatica which was held on April 12, 2006. The
324
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Appendix A: Consolidated Financial Statements of Lottomatica S.p.A for the Years Ended
December 31, 2005, 2004 and 2003
December 31, 2005—IFRS as adopted by the EU
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-1
Consolidated Balance Sheet as of December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-2
Consolidated Statement of Income for the Year Ended December 31, 2005 . . . . . . . . . . . . . . .
A-3
Consolidated Statement of Cash Flows for the Year Ended December 31, 2005 . . . . . . . . . . . .
A-4
Consolidated Statement of Shareholders’ Equity for the Year Ended December 31, 2005 . . . . .
A-5
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-6
December 31, 2004—Restated in accordance with IFRS as adopted by the EU
A-64
Transition to IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-65
Consolidated IFRS Balance Sheets as of January 1, 2004 and December 31, 2004 . . . . . . . . . .
A-69
Consolidated IFRS Statement of Income for the Year Ended December 31, 2004 . . . . . . . . . .
A-79
Effects of the Adoption of IFRS on the Consolidated Statement of Shareholders’ Equity as of
January 1, 2004, on the Consolidated Net Income for the Year Ended December 31, 2004
and on the Consolidated Shareholders’ Equity as of December 31, 2004 . . . . . . . . . . . . . . . .
A-83
Consolidated IFRS Statement of Cash Flows for the Year Ended December 31, 2004 . . . . . . .
A-87
December 31, 2004 and 2003—Italian GAAP
A-89
Consolidated Balance Sheets as of December 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . .
A-90
Consolidated Statements of Income for the Years Ended December 31, 2004 and 2003 . . . . . .
A-94
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003 . . .
A-96
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2004
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-97
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A-98
I-1
LOTTOMATICA S.p.A. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the year ended December 31, 2005
(All amounts in thousand of Euro)
Shareholders’ equity
Additional
Total
Total
Share
paid in Merger Other Retained shareholders’ minority Total
capital
capital
reserve reserves earnings
equity
interest Equity
Balance at January 1, 2005 . . . . . . . . . . . .
120
(46)
Assets contribution and merger . . . . . . . . . 88,889
Other movements and reclassifications . . . . .
Net income for the year . . . . . . . . . . . . . .
271,609
(9,765)
22,737
Balance at December 31, 2005 . . . . . . . . . . 89,009
261,844
22,737
74
74
46
112,391
383,235
8,994
112,391
5,720
18,713
1,841
388,955
8,994
114,232
18,713
112,391
504,694
7,561
512,255
The accompanying notes are an integral part of these consolidated financial statements.
A-5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in thousand of Euro, unless otherwise indicated)
1.
Form, Structure, Basis of Presentation and Consolidated Group
General Information
Lottomatica S.p.A. (‘‘Lottomatica’’ or the’’Company’’ and, together with its subsidiaries, the
‘‘Lottomatica Group’’) is the Italian government’s concessionaire to manage the Lotto and other public
games as well as the parent company of a group operating in the market of gaming, automated services for
individuals and entities and box office services. Moreover, the Company provides:
• systems and products for games;
• hardware and software terminals and systems to process games and sports/horse racing betting;
• assistance service for operations management and Help Desk for the Italian National Horse Racing
Pari-Mutuel.
Lottomatica’s registered office is located in Rome, in Viale del Campo Boario and it is incorporated
in the Republic of Italy.
The parent company of Lottomatica S.p.A. is De Agostini S.p.A.
The publication of Lottomatica Group’s consolidated financial statements for the year ended
December 31, 2005, was authorized by a resolution passed by the Board of Directors on March 9, 2006. At
the same meeting, the Board of Directors proposed to distribute a dividend of Euro 1.30 per share.
The Merger Transaction
The year 2005 was characterized by the merger by incorporation of Lottomatica S.p.A. (the ‘‘Former
Lottomatica’’) and FinEuroGames S.p.A. (‘‘FinEuroGames’’) into NewGames S.p.A. (‘‘NewGames’’ or
‘‘Lottomatica’’ as renamed after the merger). The accompanying financial statements are the first
consolidated financial statements of the incorporating company that was an inactive company until
December 31, 2004. FinEuroGames, which was the holding company of the Former Lottomatica within the
De Agostini Group, was contributed to NewGames by De Agostini S.p.A. before the Merger, on July 14,
2005. Collectively this series of transactions is referred to as the ‘‘Merger’’.
On December 14, 2005, the Merger act for the incorporation of Former Lottomatica and
FinEuroGames into NewGames (which on December 20, 2005, subsequently changed its company name to
Lottomatica S.p.A.) was finalized.
The Merger is governed by articles 2501 and subsequent of the Italian Civil Code as well as the
Consob Regulations, taking into consideration the fact that the Lottomatica shares are traded on the
Italian Stock Exchange.
Particularly, in order for the Merger to be effective:
(i) the extraordinary shareholders’ meeting of NewGames resolved to increase the share capital to
service the Merger for a maximum of A39,989,633.00 through the issue of up to 39,989,633
ordinary shares at nominal value of A1.00 each, in order to allow the share exchange of the
Lottomatica ordinary shares that belong to third parties’ shareholders, other than FinEuroGames
A-6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1.
Form, Structure, Basis of Presentation and Consolidated Group (Continued)
and NewGames, in an exchange ratio of 1 (one) NewGames ordinary share for 1 (one)
Lottomatica ordinary share;
(ii) all Former Lottomatica ordinary shares, each with a par value of A1.00, owned by FinEuroGames
and—as the case may be—by NewGames, in the moment prior to the effective date of the
Merger have been cancelled without share exchange;
(iii) all FinEuroGames ordinary shares, with a par value of A1.00 each, representing the entire share
capital, owned by NewGames on the effective date of the Merger have been cancelled without
share exchange.
On the effective date of the Merger, therefore, all the Former Lottomatica shareholders, other than
FinEuroGames and—as the case may be—NewGames, received in a share exchange NewGames ordinary
shares coming from the share capital increase to service the Merger, with a par value of A1.00 each, having
the same rights and the same characteristics of the Lottomatica shares outstanding.
The ordinary shares of the Company, resulting from the Merger, are listed and traded on the Italian
Stock Exchange. With resolution issued on December 20, 2005, the Italian Stock Exchange has admitted
the Company’s shares at the Stock-Exchange for trading on the Telematic Stock Market; the start date of
trading of the Company’s shares on the Telematic Stock Market coincided with the effective date of the
Merger in order to guarantee a seamless continuity with the listing of the Former Lottomatica ordinary
shares.
In the individual financial statements of the Company resulting from the Merger, prepared in
accordance with Italian accounting principles, goodwill of A/000 830,758 arose from the cancellation of
FinEuroGames and Former Lottomatica shares as a result of the merger, due to the difference between
the carrying values of the investments and the respective share owned of net equity. This difference was
largely affected by transactions among companies under common control within the De Agostini Group. In
the preparation of the accompanying consolidated financial statements in accordance with IFRS as
adopted by the EU, because such IFRS principles do not contain explicit applicable principles with
reference to the accounting for business combination of entities under common control, therefore,
reference has been made to the accounting principles generally accepted in the United States, in
particular, Financial Accounting Standard Board Statement (‘‘FAS’’) 141, Business Combinations, and
Emerging Issues Task Force (‘‘EITF’’) Issue 02-5, Definition of ‘‘Common Control’’ in relation to FASB
Statement No. 141. US GAAP requires that, for transactions qualifying as ‘‘reorganizations under common
control’’, that the historical cost basis be carried forward to the entity, based on the premise that due to the
fact that the exchange of interests involved were not done on an ‘‘arms length’’ basis, therefore the
exchange is not an adequate proxy for fair value. Considering this principle, the difference between the
amount of the investment initially recorded and the proportionate share of net equity which emerged from
the Merger was adjusted to be in line with the historical value of goodwill reported at the higher level of
the De Agostini Group consolidated financial statements. This adjustment was equal to A/000 566,313,
which essentially represented an increase in the equity of the Group and the related assets and liabilities of
the Group. In essence, the net effect of the Merger was to be treated as a capital contribution by the
controlling shareholder.
A-7
following table provides information related to potential commitments at February 25, 2006 (U.S. dollars
in millions):
Total potential
commitments
Performance bonds . .
Financial guarantees .
Litigation bonds . . . .
All other bonds . . . .
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$258.6
44.6
7.9
5.0
$316.1
Master Contract with the Rhode Island Lottery
In May 2003, GTECH entered into a Master Contract with the Rhode Island Lottery (the ‘‘Lottery’’)
that amended its existing contracts with the Lottery and grants GTECH the right to be the exclusive
provider of on-line, instant ticket and video lottery central systems and services for the Lottery during the
20-year term of the Master Contract for a U.S.$12.5 million up-front license fee which GTECH paid in
July 2003. This license fee is included in Intangible Assets, net in GTECH’s Consolidated Balance Sheet at
February 25, 2006 and is being amortised as a reduction of service revenue on a straight-line basis over the
20-year term of the Master Contract.
The Master Contract is part of a comprehensive economic development package that provides
incentives for GTECH to keep its world headquarters and manufacturing operations in Rhode Island.
Under the terms of the Master Contract, GTECH is to invest (or cause to be invested) at least
U.S.$100 million in the State of Rhode Island, in the aggregate, by December 31, 2008. This investment
commitment includes the U.S.$12.5 million up-front license fee; new on-line and video lottery related
hardware, software and services; the development of a new world headquarters facility of at least 210,000
square feet in Providence, Rhode Island by December 31, 2006; and improvements to GTECH’s existing
manufacturing facility in West Greenwich, Rhode Island. GTECH has agreed to employ at least 1,000
people full-time in Rhode Island by the end of calendar year 2005 (such requirement was met) and
maintain that level of employment thereafter. In the event the State of Rhode Island takes certain actions
which affect GTECH’s financial performance, GTECH will be automatically released from the in-state
employment obligation. GTECH currently plans to satisfy its obligation to invest (or cause to be invested)
at least U.S.$100 million in the State of Rhode Island by December 31, 2006. In addition, in July 2003
GTECH entered into a tax stabilisation agreement with the City of Providence (the ‘‘City’’), whereby the
City agreed to stabilise the real estate and personal property taxes payable in connection with GTECH’s
new world headquarters facility in the City for 20 years. GTECH also agreed to complete and occupy the
facility by December 31, 2006, employ 500 employees at the facility by 2009, and GTECH made certain
commitments regarding its employment, purchasing and education activities in the City. The Lottery may
terminate the Master Contract in the event that GTECH fails to meet its obligations as stated above.
Acquisition of Atronic
GTECH entered into an agreement in December 2004, as amended in January 2006, to acquire a 50%
controlling equity position in the Atronic group of companies (‘‘Atronic’’) owned by Paul and Michael
Gauselmann (the ‘‘Gauselmanns’’). The remaining 50% of Atronic will be retained by the Gauselmanns.
Atronic is a video gaming machine manufacturer and also develops gaming machine games and customised
solutions for dynamic gaming operations. This transaction is contingent upon regulatory and gaming
license approvals and other closing conditions, and is expected to be completed by December 2007.
The final purchase price for Atronic will be calculated pursuant to a performance-based formula equal
to eight times Atronic’s EBITDA (earnings before interest, taxes, depreciation and amortisation) for its
fiscal year ending December 31, 2006, provided however, that the payment shall not be less than Euro
130
20 million. In addition, the Gauselmanns have the potential to receive an earn-out payment one year after
the closing, if Atronic’s 2007 performance exceeds certain specified thresholds. However, if Euro
20 million was paid at the closing and if such payment exceeds the payment that would have been made
pursuant to the performance-based formula, then any excess will be applied to the earn-out payment.
Should GTECH purchase the remaining 50% interest in Atronic, any remaining unapplied excess would be
credited toward that purchase. GTECH currently expects the all-cash transaction will have a total value of
approximately U.S.$100 million to U.S.$150 million, for its 50% share, including the assumption of debt.
Through the end of 2011, GTECH has the option to purchase the Gauselmanns’ remaining 50%
interest in Atronic at a price calculated pursuant to a performance based formula equal to eight times
Atronic’s EBITDA for its previous twelve months, plus an earn-out payment pursuant to a performance
based formula if certain specified thresholds are exceeded. However, the payment for the second 50% shall
not be less than Euro 50 million. During this period, the Gauselmanns have put rights that become
effective only under certain circumstances. The exercise price of these puts under the specified
circumstances would be calculated through a performance based formula.
Beginning in 2012, GTECH has the option to purchase the Gauselmanns’ remaining interests in
Atronic and the Gauselmanns have a reciprocal right to sell its interest to GTECH at a value determined
by independent appraisers.
Option to Purchase PolCard Outstanding Equity
In May 2003, GTECH completed the acquisition of a controlling equity position in PolCard for
a purchase price, net of cash acquired, of U.S.$35.9 million. On September 28, 2005, GTECH purchased
an additional 11.681% of PolCard from Innova Capital Sp. z o.o. (‘‘Innova’’) for cash consideration of
approximately U.S.$21.5 million, resulting in PolCard’s outstanding equity being owned 74.5% by GTECH,
25.2% by two funds managed by Innova, and 0.3% by the Polish Bank Association, one of PolCard’s
previous owners.
The terms of the Share Purchase Agreement which govern the purchase of the additional 11.681% of
PolCard included a commitment by GTECH and Innova, as the majority shareholders of PolCard, to vote
in favour of a general shareholder dividend of approximately U.S.$25.0 million to be paid after the close of
PolCard’s fiscal year ending on February 25, 2006, and for PolCard to loan to Innova approximately
U.S.$6.3 million in anticipation of the dividend. This loan was advanced on December 22, 2005 (after the
close of GTECH’s fiscal 2006 third quarter), bears interest at WIBOR plus 1.75% (5.92% as of
February 25, 2006), and is fully secured by the dividend and by PolCard shares currently owned by Innova.
GTECH currently estimates that the dividend will be declared and paid by July 2006.
GTECH has three fair value options to purchase Innova’s interest in PolCard, and Innova has the
reciprocal right to sell its interest in PolCard to GTECH at fair value. Each fair value option has a duration
of 90 days and, in the absence of an agreed price between the parties prior to the commencement of an
option period, will be based on an appraised value from at least two investment banks at the date of each
option period.
GTECH estimates that the buyout prices in U.S. dollars of each fair value option, based on discounted
cash-flows, could be as follows:
Buyout Percentage
of the PolCard
Outstanding Equity
Exercise Date Commencing In
May 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
12.6%
6.3%
6.3%
Range of
Buyout Price
$20 to $30 million
$11 to $17 million
$13 to $19 million
Financial Risk Management and Dividend Policy
Financial Risk Management
The primary market risk inherent in GTECH’s financial instruments and exposures is the potential
loss arising from adverse changes in interest rates and foreign currency exchange rates. GTECH’s exposure
to commodity price changes is not considered material and is managed through its procurement and sales
practices. GTECH uses various techniques to manage its market risks, including from time to time, the use
of derivative instruments. GTECH manages its exposure to counterparty credit risk by entering into
financial instruments with major, financially sound counterparties with high-grade credit ratings and by
limiting exposure to any one counterparty. GTECH does not engage in currency or interest rate
speculation.
Interest Rate Market Risk
Interest rate market risk is estimated as the potential change in the fair value of GTECH’s total debt
or current earnings resulting from a hypothetical 10% adverse change in interest rates.
The estimated fair value of GTECH’s long-term debt and change in the estimated fair value due to
hypothetical changes in interest rates are as follows (U.S. dollars in millions):
At February 25,
2006
$250 million of 4.75% Senior Notes
$6.6 million of 1.75% Convertible
Debentures . . . . . . . . . . . . . . . .
Estimated Fair Value
10% Increase in 10% Decrease in
Interest Rates
Interest Rates
.....
.....
.....
$249.1
147.5
151.3
$245.1
145.4
146.8
$253.1
149.7
156.0
.....
16.1
16.1
16.1
The estimated fair values above were determined by an independent investment banker. The values of
the Senior Notes were determined after taking into consideration U.S.$225 million of interest rate swaps as
follows:
$250 million of 4.75% Senior Notes . . . . . . . . . . . . . . .
Estimated Debt
Fair Value
Interest Rate
Swaps Outstanding
(notional amount)
$249.1
147.5
151.3
$150.0
50.0
25.0
A hypothetical 10% adverse or favourable change in interest rates applied to GTECH’s variable rate
debt would not have a material effect on current earnings.
GTECH uses various techniques to mitigate the risk associated with future changes in interest rates,
including entering into interest rate swap and treasury rate lock agreements.
Interest rate swap agreements
During the third quarter of fiscal 2005, in conjunction with the issuance of U.S.$300 million of Senior
Notes, GTECH entered into interest rate swap agreements that effectively converts U.S.$50 million of its
Senior Notes from a fixed rate to a floating rate for the period November 2004 to December 2009 and
U.S.$25 million of GTECH’s Senior Notes from a fixed rate to a floating rate for the period
November 2004 to December 2014.
132
Treasury rate lock agreements
In the third quarter of fiscal 2005, GTECH entered into agreements to lock in interest rates to hedge
against potential increases to interest rates prior to the issuance of its 4.50% Senior Notes and 5.25%
Senior Notes. GTECH determined that the treasury rate lock agreements were highly effective and
qualified for hedge accounting. All treasury rate lock agreements have matured. The related gains were
deferred and recorded in Accumulated Other Comprehensive Loss in GTECH’s Consolidated Balance
Sheet and are being amortised to interest expense over the life of the respective debt instruments. As of
February 25, 2006 and February 26, 2005, unamortised gains were U.S.$1.7 and U.S.$2.0 million,
respectively.
Foreign Currency Exchange Rate Risk
GTECH is subject to foreign exchange exposures arising from current and anticipated transactions
denominated in currencies other than its functional currency, which is United States dollars, and from the
translation of foreign currency balance sheet accounts into United States dollar balance sheet accounts.
GTECH seeks to manage its foreign exchange risk by securing payment from its customers in United
States dollars, by sharing risk with its customers, by utilising foreign currency borrowings, by leading and
lagging receipts and payments, and by entering into foreign currency exchange and option contracts. In
addition, a significant portion of the costs attributable to GTECH’s foreign currency revenues are payable
in the local currencies. In limited circumstances, but whenever possible, GTECH negotiates clauses into its
contracts that allow for price adjustments should a material change in foreign exchange rates occur.
From time to time, GTECH enters into foreign currency exchange and option contracts to reduce the
exposure associated with certain firm commitments, variable service revenues and certain assets and
liabilities denominated in foreign currencies, but GTECH does not engage in foreign currency speculation.
These contracts generally have maturities of 12 months or less and are regularly renewed to provide
continuing coverage throughout the year.
As of February 25, 2006, GTECH had contracts for the sale of foreign currency of approximately
U.S.$52.1 million (primarily Euro and Brazilian real) and the purchase of foreign currency of
approximately U.S.$32.1 million (primarily Brazilian real, Mexican peso, New Taiwan dollars and
Canadian dollars). Comparatively, as of February 26, 2005, GTECH had contracts for the sale of foreign
currency of approximately U.S.$49.0 million (primarily Euro and pounds sterling) and the purchase of
foreign currency of approximately U.S.$46.4 million (primarily Brazilian real, pounds sterling, New Taiwan
dollars, and Canadian dollars). Refer to Note 14 to the consolidated financial statements for additional
information.
At February 25, 2006 and February 26, 2005, a hypothetical 10% adverse change in foreign exchange
rates would result in a translation loss of U.S.$16.8 million and U.S.$24.2 million, respectively, that would
be recorded in the equity section of GTECH’s balance sheet.
At February 25, 2006 and February 26, 2005, a hypothetical 10% adverse change in foreign exchange
rates would result in a net pre-tax transaction loss of U.S.$4.9 million and U.S.$3.6 million, respectively,
that would be recorded in current earnings after considering the effects of foreign exchange contracts
currently in place.
At February 25, 2006, a hypothetical 10% adverse change in foreign exchange rates would result in a
net reduction of cash-flows from anticipatory transactions in fiscal 2007 of U.S.$24.8 million, after
considering the effects of foreign exchange contracts currently in place. The percentage of fiscal 2006 and
2005 anticipatory cash-flows that were hedged varied throughout each fiscal year, but averaged 42% in
fiscal 2006 compared to 56% in fiscal 2005.
Dividend Policy
GTECH is committed to returning value to its shareholders. Beginning in the second quarter of fiscal
2004, GTECH commenced paying cash dividends on its common stock of U.S.$0.085 per share, equivalent
to a full-year dividend of U.S.$0.34 per share. GTECH currently plans to continue paying dividends in the
foreseeable future.
133
BUSINESS—LOTTOMATICA
Overview
Lottomatica currently operates three businesses in two segments: (i) its Lotteries and Gaming
segment, consisting of its Lotteries business (comprising Lotto, Instant and Traditional Lotteries, and
Sports Pools and Other Pari Mutuel Betting) and its Gaming Machines business and (ii) its Services
segment, consisting of its Commercial Services, Payment Services and Processing Services business. For the
year ended December 31, 2005, Lottomatica generated Total Revenues, EBITDA and Operating Profit of
A582.7 million, A266.0 million and A212.3 million, respectively.
Lottomatica’s Lotteries and Gaming segment generated Total Revenues, EBITDA and Operating
Profit of A512.2 million, A291.9 million and A251.8 million, respectively. Lottomatica’s Services segment
generated Total Revenues, EBITDA and Operating Profit of A64.7 million, A36.9 million and A31.8 million,
respectively. Total Revenues, EBITDA and Operating Profit presented for Lottomatica’s operating
segments was derived from the segment note in its audited consolidated financial statements. See segment
note number 10 to Lottomatica’s audited consolidated financial statements.
Total Revenues of A582.7 million for the year ended December 31, 2005 consist of: A503.1 million from
Lottomatica’s Lotteries and Gaming Machines businesses, A63.9 million from Lottomatica’s Services
business, A2.1 million from PCC GS S.p.A., a subsidiary of Lottomatica which supplies tickets for Lotto
and Lottomatica’s Sports Pools as well as tickets for third parties (which is allocated in Lottomatica’s
financial statements to its Lotteries and Gaming Segment), and ‘‘other revenues’’ of approximately
A13.6 million, (of which approximately (i) A7.0 million is allocated in Lottomatica’s financial statements to
its Lotteries and Gaming segment, (ii) A0.8 million is allocated to its Services segment, and
(iii) A5.7 million is not allocated). See notes numbered 4 (Information on the Consolidated Income
Statement—Revenues (28)) and 10 (Report by Business Sector) to Lottomatica’s audited consolidated
financial statements included elsewhere in this Offering Circular. Total EBITDA of A266.0 million for the
year ended December 31, 2005 includes A(62.8) million, mostly attributable to corporate overhead,
reported as unallocated EBITDA in accordance with IFRS accounting standards. Total Operating Profit of
A212.3 million for the year ended December 31, 2005 includes A(71.2) million reported as unallocated
Operating Losses in accordance with IFRS accounting standards.
Lottomatica is one of the largest lottery operators in the world, based on total wagers, and a leader in
the Italian gaming industry. Lottomatica has built an extensive real-time, on-line distribution network, with
approximately 133,000 terminals in approximately 77,000 points of sale throughout the Republic of Italy
(including approximately 17,000 points of sale where Lottomatica provides only Processing Services for
third parties), comprised of tobacconists, bars, petrol stations, newspaper stands and motorway restaurants.
Lottomatica has leveraged its distribution and transaction processing competence to expand its activities
beyond Lotteries and also provide Commercial, Payment and other Processing Services through its
network.
Since 1993, Lottomatica has been the sole concessionaire for the Italian Lotto game, which is the
largest on-line lottery in the world in terms of wagers, according to La Fleur’s 2005 World Lottery
Almanac. Lotto is a traditional game that was played off-line for centuries. Lottomatica commenced
operating Lotto in 1994. Since Lottomatica established the on-line infrastructure for Lotto, wagers have
grown significantly, stabilising in recent years in the region of A7 billion—A8 billion per year, from
A2.8 billion in 1995. Managing Lotto has provided Lottomatica with substantial experience in managing all
the activities along the lottery value chain, such as collecting wagers through its network, paying out prizes,
managing all accounting and other back office functions, running advertising and promotion, operating
data transmission networks and processing centers, training staff, providing retailers with assistance and
supplying materials for the game.
134
9.
Other Current Assets (Continued)
2005. On the basis of contractual agreements, the reversal on the part of the bet collectors (net of
the winnings paid and of their fee) takes place, on average, 15 days after delivery;
—Lottomatica Italia Servizi (A/000 15,383 net of an allowance of A/000 386) relating to credits toward
bet collectors for amounts still to be cashed for the sales of the Telecom Italia Mobile operator
recharges of the last days of the month of December;
—Lottomatica (A/000 915) for amounts to reversed by the bet collectors for the collection of the Tris
and sports gaming bets.
—The costs of the announced acquisition of the GTECH group (A/000 3,896). The amounts refer to
the invoices issued by the legal consultants who assisted the company, and that will constitute a part
of the purchase price.
10.
Tax Receivables
The tax receivables amount to A/000 3,370 (the balance of the item of the incorporated company
Lottomatica at December 31, 2004 is equal to A/000 29,979) and consist of.
December 31,
2005
VAT receivables . . . . . . . . . . . . . . . . . . . .
Tax receivables (IRES and IRAP) . . . . . . .
Withholding taxes . . . . . . . . . . . . . . . . . . .
Tax receivables on termination indemnities
Other tax receivables . . . . . . . . . . . . . . . .
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1,939
913
102
83
333
3,370
In comparison to the data shown by the Lottomatica Group at December 31, 2004, the tax receivables
present a decrease of A/000 26,609 essentially due to the reclassification of the IRES receivables to
receivables from IRES Parent company for the application of the De Agostini Group national tax
consolidation to Lottomatica and LIS.
11.
Cash and Cash Equivalents
They amount to A/000 246,163 at December 31, 2005 (the available liquidity of Lottomatica at
December 31, 2004 was equal to A/000 241,661) and consist of:
December 31,
2005
Bank and post office accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash on hands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
246,102
61
246,163
A-27
11.
Cash and Cash Equivalents (Continued)
The cash and cash equivalent balance includes the available liquidity of the Consorzio Lotterie
Nazionali, amounting to A/000 87,887, that is shown net of A/000 10,318 related to the amounts to be
transferred to the AAMS for the collection on its behalf of the tickets of the Lotteria Italia. The amount is
balanced by an equal amount included in the debts towards the AAMS. The cash related to the amount to
be reversed to the AAMS for the collection of the instant lottery, usually is reversed during the first half of
the following month.
12.
Shareholders’ Equity
The Shareholders’ equity of the Group is equal to A/000 504,694 and it consists of the following:
Share Capital
It is equal to A/000 89,009. This amount has been reached through the following operations carried out
in 2005:
—increase in capital: the variation of A/000 48,900 was deliberated on July 14, 2005 in the connection
with the FinEuroGames contribution transaction.
—increase due to exchange of shares: the amount of A/000 39,990 refers to the capital increase carried
out to service the exchange of shares in the Merger (for the Lottomatica ordinary shares owned by
shareholders of the Former Lottomatica other than FinEuroGames in a ratio of one ordinary share
for each Lottomatica ordinary share;
At December 31, 2005, the fully subscribed and paid up Lottomatica share capital consists of
89,009,000 ordinary shares, all of which have a nominal value of 1.00 euros each. Hereafter is the
movement of the shares issued by the Company during the year:
—at January 1, 2005: 120 shares at A1.00 each;
—issuance of July 14, 2005, following the contribution of the FinEuroGames investment, of 48,900
shares at A1.00 each
—issuance on December 20, 2005, following the Merger transaction, of 39,989 shares at A1.00 each.
Additional paid in capital
The item amounts to A/000 261,844. The amount of additional paid-in capital that resulted at the time
of contribution of FinEuroGames S.p.A. into NewGames S.p.A. (A/000 830,758) was adjusted in
consolidation by A/000 554,603, principally due to the effects of the Merger as described in Note 1 to these
financial statements.
The Additional paid in capital reserve has also been used to carve out the stock option reserve with
A/000 9,428 deriving from the Lottomatica S.p.A. financial statements. This reserve was accounted for at
December 31, 2004 at the time of transition to IFRS as adopted by the EU.
A-28
Interactive Channels. Lottomatica will invest in a new technological infrastructure intended to
position it to exploit the growth potential of interactive channels for its existing games portfolio.
Continuous Services Development
Lottomatica intends to consolidate existing services (electronic top-ups for pre-paid mobile
telephones, utility bills, stamp duties) by enhancing brand recognition of its ‘‘PuntoLis network’’ (under
which it offers its services) through a focused advertising campaign and through network expansion.
Lottomatica is engaged in ongoing product innovation, to enhance existing services and introduce new
services, such as stored value services which Lottomatica expects to launch in 2006.
Margin Improvement
Lottomatica continues to focus on improving margins, primarily through cost optimisation over time.
International Expansion
Lottomatica, after consolidating its business model in the Republic of Italy, intends to expand
internationally, selecting value accretive growth opportunities in its core businesses (Lotteries, Gaming
Machines and Services). This strategy will be pursued through business partnerships, acquisitions or
participation in privatisation processes or tenders for new licenses in various jurisdictions outside of the
Republic of Italy. The successful Acquisition will be a significant step in Lottomatica’s international
expansion strategy.
History and Development
Lottomatica’s registered head office is located at Viale del Campo Boario 56/D, 00153 Rome, Italy,
telephone number +39-06-518991. Lottomatica is registered with the Companies’ Register of Rome with
registration number 08028081001. Lottomatica was incorporated in the Republic of Italy as a joint stock
company on May 25, 2004 under the name Triplet S.p.A and changed its name to NewGames S.p.A. before
subsequently changing its name to Lottomatica S.p.A. Lottomatica’s corporate existence is currently
scheduled to expire on December 31, 2070.
Business Development
In 1993, the Ministry of Finances (now the Ministry of Economy and Finances) granted to
Lottomatica the exclusive concession to run Lotto, which prior to that time had been operated by the
AAMS, and transferred to Lottomatica the necessary state powers to manage all aspects of the game,
including collection of wagers through tobacconists designated by the AAMS, payment of prizes,
management of all accounting and back-office functions, advertising and promotion, operation of the data
transmission network and processing centers, staff training, tobacconists assistance and supply of game
materials to tobacconists.
Since 1998 Lottomatica also has been developing its Services business. Key milestones include:
• in 1998 Lottomatica began providing commercial services (ticketing for sporting and musical
events);
• in 1999 Lottomatica began providing processing services for car road taxes and payment services for
local taxes and fines;
• in 2000 Lottomatica began providing electronic telephone top-up services;
• in 2001 Lottomatica began collecting RAI TV license fees;
• in 2002 Lottomatica began providing processing services for minor taxes;
137
19.
Other Current Liabilities
Other current liabilities amount to A/000 233,620 (A/000 233,494 at December 31, 2004) and consist of:
December 31,
2005
Payable to AAMS . . . . . . . . . . . . . . . . .
Payable to bet collectors/telephone service
Payable to personnel . . . . . . . . . . . . . . .
Payable to social security authorities . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
........
providers .
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109,549
102,349
10,720
3,791
7,211
233,620
The significant items are described hereunder:
• Payable to AAMS: A/000 109,549 (A/000 106,143 at December 31, 2004). The amount relates to the
debt toward the AAMS for the tickets of the instant lotteries, the payment of which takes place on a
monthly basis within the 10th day of the following month, and toward the Lotteria Italia the payment
of which takes place 10 days after the final draw.
• Payable to bet collectors/telephone providers: A/000 102,349 (A/000 88,109 at December 31, 2004).
They refer to the amounts to be recognized to bet collectors/collection service providers carried out
by the companies LIS and Lottomatica. In particular the LIS debt (A/000 97,984) represents, almost
in its entirety, the debt for the amounts to be reversed to the telephone operators with regard to the
contractual dynamic of the gathering of the collections of the bet collectors in the month of
September.
• Payable to personnel: A/000 10,720 (A/000 9,619 at December 31, 2004). They refer to the accrued
compensation to be paid to employees.
• Payable to social security authorities: A/000 3,791 (A/000 2,441 at December 31, 2004) refer to the
amount due to the social security authorities for amounts withheld from employee compensation.
20.
Tax Payables
Tax payables of A/000 11,020 at December 31, 2005 (the balance of the item of the incorporated
company Lottomatica at December 31, 2004 is equal to A/000 13,346), consist of:
December 31,
2005
Income taxes payable (IRES
IRPEF withholding taxes . .
VAT payable . . . . . . . . . . .
Other tax payables . . . . . . .
and IRAP)
.........
.........
.........
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4,682
1,927
86
4,325
11,020
A-34
30.
Income Taxes (Continued)
The tables regarding the components of the deferred taxes, as well as the reconciliation between the
statutory tax rate and the effective tax rate follows:
Deferred Taxes Components
Description
Deferred tax assets:
Goodwill amortization . . . . . . . . . . . . . . . .
Sogei and Cos Goodwill amortization . . . . .
Tax Depreciation and amortization . . . . . . .
Tax Goodwill Amortization . . . . . . . . . . . .
Result premiums + MBO . . . . . . . . . . . . .
Result premium + MBO . . . . . . . . . . . . . .
Depreciation, amortization and write-down .
Write-downs . . . . . . . . . . . . . . . . . . . . . . .
Provisions for risk and other . . . . . . . . . . .
Provisions for risk and other . . . . . . . . . . .
Tax assets on prior years NOL . . . . . . . . . .
Deferred tax assets on IFRS differences . . .
Deferred tax assets on consolidation effects
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Total Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes liabilities:
Depreciation and allowance for doubtful accounts
Return of advanced amortizations . . . . . . . . . . . .
Deferred tax liabilities on IFRS differences . . . . . .
Deferred tax liabilities on IAS 17 . . . . . . . . . . . .
Deferred tax liabilities on consolidation and other . .
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Total Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income
Statement
Balance
Sheet
(9,195)
916
1,230
1,195
(2,498)
1,918
(529)
1,845
(1,031)
2,750
(321)
4,396
1,459
7,924
4,533
11,519
14,021
53
2,604
449
3,089
479
6,065
2,135
55,009
1,294
(1,987)
18,407
50
271
6,643
269
37,015
18,035
44,233
Current portion of deferred tax liabilities . . . . . . . . . . . . . . . . . .
Net effect on Income Statement . . . . . . . . . . . . . . . . . . . . . . . . .
4,273
306
509
20,170
The net deferred tax assets amounting to A/000 55,009 (the balance of the item of the incorporated
company Lottomatica at December 31, 2004 is equal to A/000 55,797) with a decrease equal to A/000 788
compared to the data of the Lottomatica Group at December 31, 2004.
The most significant tax assets are due to taxes paid in previous years by Lottomatica S.p.A., of which
the main items are linked to:
• the tax amortization of the deficit of the Lottomatica S.p.A. Merger into Tyche related to step up
the tax basis related to the prior merger with Tyco,
A-40
30.
Income Taxes (Continued)
• the devaluation of the investments held in Lottomatica Sistemi S.p.A. and Twin, which has now
been liquidated;
• the fiscal amortization of the Sogei goodwill.
The amount concerning Lottomatica Sistemi derives from the recording, carried out in the previous
accounting years, of the deferred taxes on the write-down of goodwill carried out on December 31, 2003.
The net deferred tax liabilities amounting to A/000 44,233 (the balance of the item of the incorporated
company Lottomatica at December 31, 2004 is equal to A/000 25,990) and it is mainly determined by the
fiscal effect deriving from the elimination of the goodwill amortizations (A/000 36,881).
2005
IRES tax
Statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Result before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Theoretical IRES taxes, at statutory rate . . . . . . . . . . . . . . . . . .
Permanent differences:
—Goodwill amortization . . . . . . . . . . . . . . . . . . . .
—Result premium and MBO . . . . . . . . . . . . . . . . .
—Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—Write-down of investments . . . . . . . . . . . . . . . . .
—Accurals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—Other increasing variations . . . . . . . . . . . . . . . . .
—Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—Amortization of fiscal deficit . . . . . . . . . . . . . . . .
—Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—Investment devaluation . . . . . . . . . . . . . . . . . . . .
—Other decreasing variations . . . . . . . . . . . . . . . .
—IAS adjustments not IRES taxable . . . . . . . . . . .
—Adjustments to the funded debt not IRES taxable
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33.00%
196,245
64,761
33.00%
69,926
6,640
373
545
4,076
12,890
(43,461)
(3,208)
(5,407)
(4,428)
(21,560)
(102,758)
43,767
Taxable Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
153,460
Current IRES taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50,642
A-41
Tax Rate
25.81%
2006. The next hearing is scheduled to be held on January 28, 2010. The duration and outcome of the
appeal cannot be predicted. See ‘‘Risk Factors—Risk Factors Relating to Lottomatica—Lottomatica’s
business is dependent upon the Lotto concession’’ and ‘‘Risk Factors—Risk Factors Relating to
Lottomatica—Revocation or termination of Lotto concession would have a material adverse impact on
Lottomatica’s revenues’’.
Game Description
Lotto is based on the draw of five numbers, from 1 to 90 included, on one of 10 regional draw wheels
located in Bari, Cagliari, Florence, Genoa, Milan, Naples, Palermo, Rome, Turin and Venice, and on a
separate wheel known as the ‘‘National Wheel’’. The five numbers drawn determine the winnings related
to each wheel.
Before the draw, each player chooses one or more numbers (with a maximum of ten) and places a bet
on the draw of the number or combinations of numbers chosen by them, on one or all of the draw wheels,
with the exception of the bets on the National Wheel, which may be carried out exclusively on such wheel,
to the exclusion of the other wheels. The combinations of numbers selected for the bet (commonly named
‘‘drawn number’’) are: single drawn number, exact order of the drawn number, two numbers, three numbers,
four numbers and five numbers.
Combination
Drawn number . . . . . . . . . . .
Exact order of drawn number
Two numbers . . . . . . . . . . . .
Three numbers . . . . . . . . . . .
Four numbers . . . . . . . . . . . .
Five numbers . . . . . . . . . . . .
Winning Multipliers
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11.232x
55x
250x
4,500x
120,000x
6,000,000x
The maximum win per ticket cannot exceed A6 million, regardless of the allocation of the amount
wagered on each combination. The state tax payable on winnings is 6% and is directly withheld from
winnings.
The bets can vary from a minimum of A1.00 to a maximum of A200. The prizes, the amounts of which
are determined based on the odds of the chosen combination being drawn, are in inverse proportion to the
number of the wheels selected and to the number of possible combinations derived from the quantity of
numbers played. For example, when placing a bet on all the wheels, the amount of the prize will be equal
to one tenth of the prize for a bet on only one wheel, and, where more numbers are played than those
necessary to make up the chosen lots, the prize will be in inverse proportion to the number of the possible
combinations (for example, a ‘‘three number’’ combination bet playing only three numbers, all drawn on
only one wheel, will pay more than a bet playing five numbers of which only three are drawn on the same
wheel).
The Fee
As compensation for its management of Lotto, Lottomatica receives a fee, equal to a percentage of
the amount wagered.
The Lotto fee is based on a decreasing scale, called ‘‘décalage’’. The fee rate initially applied is
6.501% of the amount wagered; as the total wagers increase, the fee rate subsequently applied to
incremental wagers gradually decreases. As a result, the average fee rate (expressed as a percentage of the
total wagers collected) in a given year gradually declines, as the total wagers amount increases. This
mechanism has a stabilising effect on Lotto revenues. In fact, if total wagers drop in a certain year,
Lottomatica’s revenues decline less than proportionally, as the average fee rate (expressed as a percentage
141
of the total wagers collected) increases. The converse also is true; Lotto revenues do not increase in direct
proportion to an increase in total wagers from year-to-year.
In order to apply the décalage system, the annual collection volumes are divided into brackets (whose
minimum and maximum thresholds are set by Ministerial Decree) each having a percentage rate that is
used to calculate the fee due to Lottomatica for the corresponding wagers.
As of the date of this Offering Circular, the brackets from which the fee due to Lottomatica is
determined are as follows:
Fee Due to Lottomatica
(As a percentage of the
Total Wagers Collected)
Total Annual Wagers(*)
(in millions of euro)
Bracket
1st . . . . . . . . . . . . .
2nd . . . . . . . . . . . .
3rd . . . . . . . . . . . .
4th . . . . . . . . . . . . .
5th . . . . . . . . . . . . .
6th . . . . . . . . . . . . .
7th . . . . . . . . . . . . .
8th . . . . . . . . . . . . .
Successive Brackets
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Up to 714
From, 714 to 1,072
From 1,072 to 1,429
From 1,429 to 2,142
From 2,142 to 2,856
From 2,856 to 3,571
From 3,571 to 4,285
From 4,285 to 4,999
Over 4,999 approximately successive
brackets of A714 million each
6.501%
6.495%
6.467%
6.439%
6.429%
6.418%
6.408%
6.398%
Constant reduction of 0.160%, which
is applied as percentage reduction on
the rate of the previous bracket.
(*) Bracket amounts inclusive of Italian consumer price index (‘‘Istat index’’) revaluation.
Furthermore, for the annual collection brackets greater than A4,999 million, there is an additional
reduction in the fee due to Lottomatica. In these higher collection brackets, Lottomatica receives only a
percentage of the fee amount determined pursuant to the table above. The percentages applied to the fee
determined for the relevant bracket are set forth in the table below.
Collection Percentage Applied to
the Corresponding Rate is
Bracket (in millions of euro)
Between
Between
Between
Between
Between
Between
Between
Between
4,999
5,713
6,472
7,142
7,856
8,569
9,284
9,998
and
and
and
and
and
and
and
and
5,713 .
6,472 .
7,142 .
7,856 .
8,569 .
9,284 .
9,998 .
10,712
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.
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.
85%
78%
68%
55%
40%
25%
25%
10%
of
of
of
of
of
of
of
of
the
the
the
the
the
the
the
the
collection
collection
collection
collection
collection
collection
collection
collection
bracket
bracket
bracket
bracket
bracket
bracket
bracket
bracket(*)
(*) For bracket amounts greater than A10,712 million, the collection percentage on which the rate is applied is always equal to 10%
of the bracket.
In order to take into consideration the effects of inflation on the determination of the fee, the
minimum and maximum thresholds of each bracket (initially determined by the Ministerial Decree of
November 8, 1993) are updated annually in a manner which corresponds to the variation of the Istat index
for blue and white-collar families.
The fee determination mechanism (the décalage together with the fee reduction mechanism when the
collection volume increases), operates such that, an increase in the volume of wagers does not result in a
proportionate increase in Lottomatica’s revenues and a decrease in the volume of wagers does not result in
142
a proportional decrease in such revenues. This mechanism materially mitigates the effect of volatility in
wagering volumes on Lottomatica’s revenues from year-to-year. The table below illustrates this effect.
REVENUES BY WAGERS
600
500
400
300
200
100
4
71
9
42
1,
6
85
2,
5
28
4,
3
71
5,
2
14
7,
9
56
8,
8
99
9,
27
,4
11
55
,8
12
83
,2
14
11
,7
15
40
,1
17
67
,5
18
96
,9
19
29APR200614571439
The revenues generated by the operation of Lotto were equal to approximately A412.8 million in 2003,
A494.2 million in 2004 and A432.3 million in 2005 (with respect to wagers equal to approximately
A6,937 million in 2003, A11,722 million in 2004 and A7,281 million in 2005). This unusually higher level in
2004 was attributable to speculative wagers on late numbers, in particular number 53 on the Venice draw
wheel. The number 53 was drawn on the Venice wheel in early 2005, following which the amounts placed as
speculative wagers returned to historic levels.
Lottomatica is required to provide a performance bond in an amount equal to 0.3% of total wagers
for the prior fiscal year to the AAMS to guarantee performance of Lottomatica’s obligations pursuant to
the Lotto concession. The amount of the performance bond is updated upon request of the AAMS. As of
the date of this Offering Circular, the aggregate amount of performance bonds issued to guarantee
Lottomatica’s fulfilment of its obligations with respect to the Lotto concession, is A35,106,027.08.
For the year ended December 31, 2005, total wagers collected for Instant and Traditional Lotteries
were approximately A1.5 billion, which generated Revenues for Lottomatica of A54.9 million, or
approximately 9.4% of Total Revenues.
In October 2003, the Ministry of Economy and Finances granted to Consorzio Lotterie Nazionali, a
consortium 63% owned by Lottomatica, the exclusive concession to operate Instant and Traditional
Lotteries, which prior to that time had been operated by the AAMS. The remaining shares of the
consortium are held by Scientific Games International, Inc. (20%), Arianna 2001 S.p.A. (15%) and others.
The concession expires in March, 2010, with respect to Traditional lotteries, and in May, 2010, with respect
to Instant Lotteries, unless such terms are extended at the discretion of the AAMS. Instant and Traditional
Lotteries can be played mainly at tobacconists, but also at bars, motorway restaurants and newspaper
stands. Instant and Traditional lotteries are available at approximately 35,800 points of sale (of which
approximately 26,900 are also Lotto points of sale). The Lotto, Sports Pools and Other Pari-Mutuel
Betting and Services networks and terminals also support the Instant and Traditional Lotteries, for which
Lottomatica provides a dedicated DPC.
143
As compensation for its management of the Instant and Traditional Lotteries, Lottomatica receives a
fee, equal to a percentage of the amount wagered.
The Instant and Traditional Lotteries fee is based on a scale or décalage similar to the one used to
calculate Lotto fee. The fee rate initially applied is 12.37% of the amount wagered (including applicable
VAT); as the total wagers increase, the fee rate subsequently applied to incremental wagers gradually
decreases. Such fee also includes the retailer’s fee, which is 8% of the amount wagered in the case of
Instant Lotteries and 10% of the amount wagered, in the case of Traditional Lotteries. As a result, the
average fee rate (expressed as a percentage of the total wagers collected) in a given year gradually declines,
as the total wagers amount increases. This mechanism has a stabilising effect on Instant and Traditional
Lotteries revenues. In fact, if total wagers drop in a certain year, Lottomatica’s revenues decline less than
proportionally, as the average fee rate (expressed as a percentage of the total wagers collected) increases.
The converse also is true; Instant and Traditional Lotteries revenues do not increase in direct proportion to
an increase in total wagers from year-to-year. In order to take into consideration the effects of inflation on
the determination of the fee, the minimum and maximum thresholds of each bracket are updated annually
in a manner which corresponds to the ISTAT index for the income of white collar families.
As of the date of this Offering Circular, the brackets from which the fee due to Lottomatica for
Instant and Traditional Lotteries is determined are as follows:
Bracket
1st .
2nd
3rd
4th
5th
.
.
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.
.
.
.
.
.
.
Total Annual Wagers (E)
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.
Fee Due to Lottomatica
(As a percentage of the Total Wagers Collected)
Up to 533,499,977
From 533,499,977 to 800,250,000
From 800,250,000 to 1,067,000,000
From 1,067,000,000 to 1,600,500,000
Over 1,600,500,000
12.37%
12.32%
12.27%
12.22%
12.17%
Instant Lotteries
For the year ended December 31, 2005, 793 million Instant Lottery tickets were sold, representing
total wagers of approximately A1.5 billion.
Instant Lotteries are off-line lotteries consisting of scratch-off tickets with hidden numbers, letters
and/or symbols that participants scratch off and immediately know whether they have won. The
determination of the number of lotteries to be called, their issue date, the sales price of the ticket to the
public, the number of tickets to be produced for each lottery, the winning combinations, and the prizes, are
determined by the Consorzio Lotterie Nazionali, which is required to present the plan of each Instant
Lottery for the prior authorisation of the AAMS.
Instant Lotteries, which were launched in 1994 and operated directly by the AAMS, grew rapidly until
1996, becoming very popular in the Republic of Italy. After 1997, the popularity of the game declined due
to player dissatisfaction, attributable both to a loss of trust in the game and to a decline in the marketing
power supporting the product. The decline in consumer trust can be largely attributed to an incident in
1997 in which an exceptionally high number of winning tickets was distributed in Curno, a small village in
Northern Italy, and the AAMS did not honor winning tickets because it suspected that fraud had occurred.
Consorzio Lotterie Nazionali took steps to revitalise the game commencing in mid-2004, after it was
awarded the concession, and generated A400 million in total wagers during the next six months.
The key factors of the Instant Lotteries revitalisation plan are:
Product innovation: introduction of a greater, innovative offering of games, for diverse customer
segments, and with a much higher payout than in the past;
144
35.
Stock Option Plans (Continued)
2005-2010 Plans
The same extraordinary shareholders’ meeting of the incorporated NewGames S.p.A. of
September 21, 2005, has also deliberated, still with effect on the effective date of the above-mentioned
merger, and in conformity with that deliberated on April 12, 2005, by the incorporated Lottomatica S.p.A.
in the extraordinary shareholders’ meeting and in the meetings of the Board of Directors of May 12 and/or
of July 15, 2005, setting as underwriting deadline the date of December 31, 2010:
• a paid increase of the share capital in divisible form, of maximum A297,580.00 with issuance, also in
multiple tranches, of maximum 297,580 new ordinary shares with nominal value of 1.00 euro each,
regular rights of enjoyment, with the exclusion of the right of option in conformity with article 2441,
paragraph 5, of the Civil Code, servicing the exercise of the 297,580 options already assigned by the
incorporated Lottomatica S.p.A. and still exercisable in the ambit of the stock option plan reserved
for the executives of the incorporated Lottomatica S.p.A. and/or of its controlled companies;
• a paid increase of the share capital, in divisible form, of maximum A57,016 with issuance, also in
multiple tranches, of maximum 57,016 new ordinary shares with nominal value of 1.00 euro each,
regular rights of enjoyment, with the exclusion of the right of option in conformity with article 2441,
paragraph 5, of the Civil Code, to the service of exercising of 57,016 options already assigned and
still able to be exercised in the real of the stock option plan reserved for administrators of the
former Lottomatica S.p.A.;
• a paid increase of the share capital, in divisible form, of maximum A219,812 with issuance, also in
multiple tranches, of maximum 219,812.00 new ordinary shares with nominal value of 1.00 euro
each, regular rights of enjoyment, with the exclusion of the right of option in conformity with
article 2441, paragraph 5, of the Civil Code, servicing the exercise of the 219,812 options already
assigned by the incorporated Lottomatica S.p.A. and still exercisable in the ambit of the stock
option plan reserved for the administrators of the incorporated Lottomatica S.p.A.
The right of exercise of the options for the 2005-2010 plans is subordinated to the following maturity
conditions: the employment within the Group on the start date of when the options can be exercised and
the achievement on the part of the group of a determined level of total consolidated EBITDA in the
2005-2007 period.
For the purposes of the evaluation of the stock option plans, Black and Scholes was adopted.
A-48
channels. The operation on a trial basis will last 18 months from the date of the introduction in the market
of the first lottery. However, all the concessionaires will be able to collect wagers for these ‘‘new lotteries’’
by connecting to the platform built by Lottomatica.
Sports Pools and Other Pari-Mutuel Betting
For the year ended December 31, 2005, total wagers collected for Sports Pools and Other Pari-Mutuel
Betting were approximately A169 million, which generated Revenues for Lottomatica of A9.5 million or
approximately 1.6% of Total Revenues. Lottomatica maintains a separate network of installed terminals
for Sports Pools and Other Pari-Mutuel Betting, which are located mostly at bars, but also at certain large
tobacconists, and Lottomatica has approximately 5,300 points of sale (of which approximately 3,700 are
also Lotto points of sale). These betting terminals are linked in real-time to a host data processing center
provided by SOCIETÀ GENERALE D’INFORMATICA—S.p.A. (‘‘Sogei’’), a company 100% owned by
Ministry of Economy and Finances. A host DPC also is maintained for administrative and back-office
functions of the Sports Pools and Other Pari-Mutuel Betting by the Consorzio Lottomatica Giochi
Sportivi, a consortium 90% owned by Lottomatica (the remaining 10% is owned by Totocom-Agenzie On
Line and Telecos S.p.A.). The structure for the Sports Pools and Other Pari-Mutuel Betting
telecommunications network is similar to the Lotto network, although completely separate.
Totocalcio, Totogol and ‘‘9’’
In June 2003, the Ministry of Economy and Finances granted a non-exclusive concession to
Lottomatica, through Consorzio Lottomatica Giochi Sportivi, a consortium 90% owned by Lottomatica,
and two other operators, Sisal S.p.A. and Snai S.p.A. to collect wagers for Totocalcio, Totogol and the ‘‘9’’
games, which were previously operated by the CONI. The remaining 10% of Consorzio Lottomatica
Giochi Sportivi is owned by Totocom-Agenzie on-line 5% and Telcos S.p.A. 5%. The Totocalcio concession
expires on July 31, 2007, unless it is extended for an additional year at the discretion of the AAMS.
Totocalcio is played by wagering on the outcome of 14 sporting events, usually soccer matches. Totogol
involves the prediction of the number of goals scored in each of the 14 proposed matches on the play slip.
In addition to correctly predicting the results, it is also possible to win before the events take place; at the
moment of validation of the play slip players may win small prizes based on random selection. ‘‘9’’ is a
pari-mutuel game played with Totocalcio, in which the player predicts the first nine predictions of a
Totocalcio unit column.
The fee paid to Consorzio Lottomatica Giochi Sportivi for operating Totocalcio, Totogol and ‘‘9’’ is
equal to 3.45% of the total wagered amounts.
Other Pari-Mutuel Betting
The competitions linked to Olympic sports (basketball, soccer, cycling, downhill skiing, cross-country
skiing, tennis, sailing and volleyball), motor sports (car and motorcycle racing), and non-sports events
connected with the world of entertainment, music, culture, and current affairs of primary national and
international importance are the subject of betting in the Republic of Italy.
The betting can be:
• pari-mutuel—where the total pool of wagers placed, minus a specified percentage, is divided among
the winning players according to a formula set by the AAMS. A winner will be paid an amount
equal to his or her share of the prize pool. The minimum bet is A2; or
• fixed odds—where the payout amount is agreed upon in advance between the player and the
bookmaker. In the case of a win, the bookmaker pays an amount equal to the bet multiplied by the
odds fixed at the moment of the bet. The minimum bet is A3.
146
37.
Significant Legal Proceedings (Continued)
Authority presented a request for information to Lottomatica on the value of the gaming market, as well as
on its turnover and on the investments undertaken by Lottomatica between 2000 and 2003.
During the proceedings, in addition to the parties Sisal and Lottomatica, the following parties were
also heard: FIT (‘‘Federazione Italiana Tabaccai’’, or Italian Tobacconist Federation), the foreign operator
G-TECH, the former Chief Executive Officer of the company Formula Giochi and the Association of Toto
bet collectors (‘‘UTIS Unione Totoricevitori Italiani Sportivi’’ or Union of Italian Sports Toto Bet
Collectors), and finally the AAMS.
Lottomatica accessed the proceeding records as necessary to verify the content of the previous
hearings and all of the available documentation gathered from time to time by the Authority, in order to
better assess the elements in the possession of the Authority and adjust its own defensive strategy
accordingly.
In a notice dated August 3, 2004, as a result of the documentation gathered and the hearings held, the
Authority sent the findings of its preliminary investigation, alleging an understanding between Lottomatica
and Sisal. Lottomatica filed its final pleading and on October 13, 2004, the final hearing was held. At the
meeting of November 25, 2004, the Competition and Market Authority resolved to close the preliminary
investigation, fining Lottomatica and Sisal, by an amount, pursuant to the regulation in force,
proportionate to their individual turnover, respectively of A8 million and A2.8 million.. Moreover, the
Authority also ordered Lottomatica and Sisal to end their conduct tending to distort competition, requiring
them to communicate the adopted measures within 90 days.
Lottomatica challenged the foundation of the accusations made against it by the Authority, and
therefore filed an appeal through its attorneys to TAR against the above-mentioned decision, requesting
the suspension of the order itself.
At the hearing of March 2, 2005, the TAR rejected the request to suspend payment of the monetary
sanction and accepted the ancillary request of suspension, given the generic contents of the warning
formulated by the Authority.
The hearing to discuss the matter was scheduled for March 4, 2005.
On March 24, 2005, Stanley International Betting Limited, having served its own opposing appeal to
the appeals filed by Sisal and Lottomatica, requested that the Authority order be confirmed.
The Authority, in compliance with the ordinance issued by the TAR Lazio on March 2, 2005, notified
the deliberation reached in its meeting of March 31, 2005, to Lottomatica and Sisal
Lottomatica and Sisal, with additional motivations challenged the aforementioned deliberation of the
Authority once again contesting its generic nature.
By a ruling published on June 15, 2005, the TAR Lazio rejected the appeals and the additional
motivations presented by Lottomatica and Sisal. On November 30, 2005, the motivations of the legitimacy
of the sanction imposed by the Authority were made known. Lottomatica, with the help of its attorneys, is
preparing to file an appeal against the decision taken by the magistrate, the terms of which will expire on
March 30, 2006. In any case, and with reservation, Lottomatica has, however provided to pay the fine of
A-53
37.
the sanction and comply with the injunction, by sending to all the bet collectors the communication
requested by the Authority in which they were informed about the possibility for the bet collectors
themselves to associate with other operators for games other than the Lotto, the Lotteries and Scratch and
Win lotteries. In a note dated October 2005, the Authority notified Lottomatica of having acknowledged
that the order in question had been duly complied with.
Video Lotteries
SAPAR—Associazione Nazionale Apparecchi per Pubbliche Attrazioni Ricreative (National
Association for Public Recreational Devices)—and FM S.r.l., with reference to the tender called for by the
Autonomous Administration of the State Monopolies in April 2004 for the selection of the concessionaires
for the activation and handling of entertainment devices (video lotteries)—concluded in June 2004 with
the stipulation of the concession agreements with the ten selected operators (among which RTI
Lottomatica)—brought an appeal before the TAR Lazio in order to obtain, among other things, the
voiding, following suspension, of the tender.
Lottomatica and the other concessionaires appealed in court.
The TAR Lazio, with ordinance dated June 9, 2004, rejected the suspension request presented by the
SAPAR plaintiffs. The suspension and annulment of the tender in question was also requested in a
separate appeal before the TAR Lazio by a group of video-lottery service providers. At the hearing of
September 29, 2004, the TAR Lazio rejected this suspension request. This appeal was then reunited with
that of SAPAR and FM.
The TAR Lazio rejected the adverse appeals in the sentence issued on May 5, 2005. The mentioned
sentence of May 5, 2005, therefore also concerns this last appeal.
On November 3, 2005, SAPAR and FM brought the appeal before the State Council, re-proposing the
reasons that were not accepted by the TAR. According to the attorneys assisting Lottomatica, there is
reason to believe that the appeal will be rejected as well. As of today, the date of the hearing for discussion
of the appeal has not been scheduled.
Deferred and Instant-Draw National Lotteries
Lottomatica participated, as representative of a Temporary Company Grouping in course of
incorporation, to the tender called by the Autonomous Administration of the State Monopolies for the
assignment of the management service of the deferred and instant-draw national lotteries.
In a note dated July 30, 2001, addressed to Lottomatica, the State Monopolies informed that the
tender had been won by the company RTI Lottomatica (formed, beyond Lottomatica, by the companies
SCIENTIFIC GAMES, Arianna 2001 S.p.A., Poligrafico Calcografia & Cartevalori S.p.A., EIS, Tecnost
Sistemi S.p.A., and Servizi Base 2001 S.p.A.) in course of incorporation.
The tender has been subject to various appeals that can be summarized as follows:
• SISAL appeal: given the renunciation to appear presented by Sisal at the hearing of April 10, 2002,
the appeal can be considered definitely concluded;
A-54
concessionaire may connect to its network only the number of Gaming Machines indicated in the specific
AAMS authorisation. On December 31, 2005, authorisations were granted to RTI Videolot, to connect to
its network 12,000 amusement with prize machines, 8,500 of which are already installed in commercial
outlets. Such machines are owned and maintained by over 40 operators. Lottomatica, through RTI
Videolot, may request that additional Gaming Machines be added to its network, subject to a specific prior
authorisation by AAMS and further provided that the total number of Gaming Machines that are the
subject of Lottomatica’s concession may not exceed 25% of the total number of machines connected by all
concessionaires to the AAMS network. See ‘‘—Legal Proceedings’’.
Wagers generated from Gaming Machines are presently allocated as follows:
• 75% of revenue must be paid out in prizes;
• Of the remaining 25%:
• 13.5% (effective July 1, 2006 this is reduced to 12.0%) goes to tax;
• 0.3% (effective July 1, 2006 this is increased to 0.8%) goes to the AAMS; and
• 11.2% (effective July 1, 2006 this is increased to 12.2%) is split among the business where the
machine is located (usually a bar), the operator (who purchases, installs and maintains the
machine and collects from it) and the concessionaire (i.e., Lottomatica) who is responsible for
monitoring (through its network to which the machine is linked) its compliance with the
regulations and the amount of tax to be paid. The split is negotiated among the parties.
Lottomatica collects from the operators the fee for the AAMS, the tax payable and Lottomatica’s fee
(usually around 1%). Lottomatica is required to pay the AAMS fee and accrued tax and seeks to reclaim
the foregoing from the operator.
Services
Leveraging its distribution network and transaction processing experience, Lottomatica offers through
its subsidiaries, LIS, Totobit, CartaLis IMEL S.p.A. (‘‘CartaLis IMEL’’) and LIS Finanziaria, Commercial
Services, Payment Services and Processing Services.
Lottomatica’s services network comprises approximately 55,000 points of sale (including
approximately 17,000 points of sale where Lottomatica provides only Processing Services for third-parties)
divided among tobacconists, bars, petrol stations, newspapers stands, motorway restaurants. Lottomatica
has approximately 50,000 POS terminals installed at these locations (of which approximately 21,000
overlap with Lotto points of sale) and approximately 22,000 Lis Printers installed at tobacconists. The Lis
Printer is a proprietary dedicated terminal for printing of stamp duties. Lottomatica maintains a host DPC
supporting its services network. All services are provided through its separate services network (other than
car road tax processing, which continues to be handled through the Lotto terminals). Not all points of sale
with a POS terminal offer all services provided by Lottomatica.
In addition, through CartaLis IMEL, Lottomatica expects to launch stored value services, issuing and
acquiring services related to pre-paid debit cards, for which necessary authorisation has been received from
the Bank of Italy.
Lottomatica has been providing commercial, payment and processing services since 1998. Key
milestones in the expansion of Lottomatica’s Services business include:
• in 1998 Lottomatica began providing commercial services (ticketing for sporting and musical
events);
• in 1999 Lottomatica began providing processing services for car road taxes and payment services for
local taxes and fines;
149
37.
June 18 and 19, no penalty would be due. The next August 12, LOTTOMATICA nonetheless provided to
pay the AAMS the claimed amount, notwithstanding the continued contestation of the foundation of the
request, and reserving to assert its reasons wherever appropriate. On September 16, 2005, Lottomatica
formally requested the AAMS to reimburse the amount paid as tax damages, within 15 days, also attaching
a copy of the pro-veritate opinion presented by its attorney (Carlo Mirabile, Attorney at Law) supporting
the above arguments. Lottomatica also reserved to activate the foreseen arbitration proceeding in case of
non-reimbursement. On October 6, 2005, the AAMS replied to the above note declaring it believed the
request to be unfounded, and that it had informed the General State Bar about the Lottomatica request
for the evaluation and reporting of eventual technical modalities. Therefore, Lottomatica is waiting to
learn the decisions of the Bar before starting the dreaded arbitration process.
Moreover, LOTTOMATICA contested the network malfunction of June 18, 2005, to the supplier
BNL Multiservizi, reserving to apply the contractually foreseen penalties, to request compensation for
further damages suffered, and to proceed to the annulment of the contract. BNL Multiservizi rejected the
LOTTOMATICA imputations declaring that it was not responsible for the malfunction. Moreover,
Lottomatica, on September 14, 2005, following the occurred payment of the amount of A7.5 million in
favor of the AAMS, requested BNL Multiservizi to immediately repay this amount and has foreseen the
initiation of an arbitration process to ascertain the occurred annulment of the contract due to negligence
of the latter.
Subsequent to a further denial of BNL Multiservizi, on November 2, 2005, Lottomatica served BNL
Multiservizi the act of appointment of its arbitrator in the person of Prof. Berardino Libonati, requesting
that the annulment of the contract due to fact and negligence on the part of BNL Multiservizi is
ascertained, and that, moreover, BNL Multiservizi be condemned to pay A7,558,648.00 in favor of
Lottomatica, as well as further damages suffered by the same Lottomatica.
On November 23, 2005, BNL Multiservizi notified about the act of appointment of its arbitrator in the
person of Prof. Salvatore Pescatore, Attorney at Law. Concomitantly, it requested the rejection of the
requests formulated by Lottomatica and the ascertainment of the impact of the third draw of the week of
the Lotto game and of the further services transmitted through its own network, quantifying the eventual
amounts due to Lottomatica for this service.
As of today, the two arbitrators have not yet provided to the appointment of the third arbitrator
carrying out the function of President, and therefore the Board has not yet formed.
Sports Games Selection Procedure (ex Coni)
The tender procedure called on April 15, 2003 by the Autonomous Administration of the State
Monopolies for the ‘‘selection of operators (providers) for the purposes of the concession of activities and
public functions regarding games of chance as well as other, eventual, games linked to sports events’’, that
ended on June 2003 with the stipulation of the concessions to the three operators selected—among which
the Consortium made up of Lottomatica together with Totobit Informatica Software e Sistemi S.p.A.,
Consorzio Totocom Agenzie On Line, Telcos S.p.A.—was subject to various claims.
A-57
37.
February 2006, the Court of Appeals granted the parties 30 days for notes, reserving to schedule the
following hearing.
NETWORK TENDER APPEAL
The appearing RTI ALBACOM—FASTWEB brought an appeal before the TAR Lazio on
October 27, 2005, for the annulment, following precautionary order, of all the tenders for the assignment
of the data transmission service on the virtual private network for the Lotto Game called by Lottomatica
S.p.A., requesting, moreover, the condemnation of the same Lottomatica to reimburse the damages.
Lottomatica appeared before the court and requested the rejection of the requests made by the
claimant.
At the hearing of November 23, 2005, the Temporary Company Grouping ALBACOM—FASTWEB
renounced its suspension request. As of today, the hearing discussing the question has not yet been
scheduled.
38.
Commitments
At December 31, 2005, the Group has existing commitments of A/000 297,289 that include guarantees
of A/000 292,523 and other commitments of A/000 4,766.
The most important items concern:
• guarantees granted to the telephone (Tim Italia, Vodafone, Wind, H3G) and television companies
as guarantee of the obligations undertaken by Lottomatica Italia Servizi S.p.A. and Totobit S.p.A.
against the contracts for the service of automatically recharging pre-paid services (A/000 171,661);
• guarantees granted by Efibanca and Banca di Roma in favor of the Ministry of Finance as
guarantee of the obligations undertaken by Lottomatica S.p.A. against the concession of the Lotto
game (A/000 36,707);
• guarantees issued in the interest of the Consorzio Lotterie Nazionali pursuant to the Lottomatica
S.p.A. assignments in favor of the AAMS as guarantee of the fulfillment on the part of the
Consorzio of all the obligations stemming from the Agreement, as reported in article 10 of the
Concession dated October 14, 2003 (A/000 25,823);
• guarantees of A/000 22,474, entirely granted by Lottomatica S.p.A. and Lottomatica Italia Servizi
S.p.A. to the Revenue Agency, against the credit used in the ambit of the Group VAT procedure;
• guarantees granted in the interest of RTI Videolot S.p.A., pursuant to the Lottomatica S.p.A.
assignments in favor of the AAMS, as guarantee of the fulfillment of the obligations regarding the
Video Lottery concession on the part of the same RTI Videolot S.p.A. (A/000 15,385);
• guarantees released in the interest of the Consorzio Lottomatica Giochi Sportivi pursuant to the
Lottomatica S.p.A. assignments in favor of the AAMS, as guarantee of the fulfillment on the part of
the Consorzio Giochi Sportivi of all the obligations inherent to gaming; (A/000 15,000);
A-59
38.
Commitments (Continued)
• guarantees granted to companies of the group pursuant to Lottomatica S.p.A. assignments as
guarantees regarding sweepstakes (A/000 2,964);
• guarantees granted by Lottomatica S.p.A. as guarantee of the stipulated rental agreements (A/000
1,836);
• guarantees granted to Sogei by Lottomatica S.p.A. for the horserace sports events of A/000 626.
The item ‘‘other’’ amounts as a whole to A/000 4,766 and comprises:
• three letters of patronage (amounting to A/000 3,920 maximum) released by Lottomatica in favor of
the controlled company LIS, as guarantee of the contractual obligations undertaken by the latter for
the contracts with Juventus Calcio (A/000 2,582), Torino Calcio of A/000 775 and Vicenza Calcio of
A/000 258; and a letter of patronage toward the controlled company PCC of A/000 305;
• the Lottomatica S.p.A. values deposited at Comit (A/000 120) for the gold coins that have not been
collected by the winners of the ‘‘Cinquinotto’’ sweepstake;
• the PCC commitment of the fees maturing on January 1, 2006 of A/000 726 for the rental contracts
stipulated for equipment and machinery.
Lottomatica S.p.A., moreover, uses A/000 213,074 toward its controlled companies, of which the
assignments granted by Banca Popolare di Bergamo amount to A/000 94,690, A/000 60,323 by
Banca Antonveneta, A/000 13 by Monte dei Paschi di Siena, A/000 45 by Unicredito.
39.
Collection and Payment Activities
Enclosed is the information of the ‘‘collection and payment activities’’ carried out by Lottomatica
based on the authority transferred by Italian Decree of the President of the Republic No. 560.
These activities, totaling A/000 178,225 is made up as follows:
Receivables
Receivables amount to A/000 4,065 and represent the receivable for the management toward the
collectors against the amounts that the same must pay, net of the winnings and quotas that belong to them.
Cash and Cash equivalent
Cash and cash equivalent amounts to A/000 174,160 and represents the accounting balances at
December 31, 2005, of the management activities on its related bank and post office accounts:
• A/000 134,363 on a specific bank account opened at Banca Intesa S.p.A.;
• A/000 39,797 on a specific postal account.
A-60
Lottomatica receives from the end-user a fee based on percentage of the payment made by the
end-user.
Other
Lottomatica also provides processing services for third-party electronic top-up transactions, payment
services for the duties due in connection with legal proceedings, payment services for certain minor taxes
and loyalty programs.
New Products
CartaLis IMEL received the authorisation of the Bank of Italy on January 10, 2006 to start the
business of issuing stored value cards after presenting the formal request on September 21, 2005. The Bank
of Italy has confirmed that CartaLis IMEL, which, as of the date of this Offering Circular, is owned 85% by
Lottomatica and 15% by Sella Holding Banca S.p.A., was the first Italian company to register with the
Bank of Italy to issue stored value cards.
CartaLis IMEL will be active in the field of issuing stored value cards and the respective acceptance
circuit. Lottomatica will provide its distribution network and its know-how regarding commercial
management and point of sale networks, while Sella Holding Banca S.p.A. will provide its experience
relating to the management of payment, process and verification systems, as well as a network of
businesses authorised to accept electronic payments.
The stored value market can be compared in terms of evolution with the market for pre-paid debit
cards. The market of the pre-paid cards has recorded a strong consumer interest in the past few years.
Seasonality
While no significant seasonality exists for Lotto, the Instant Lotteries and the Gaming Machines,
Lottomatica has experienced seasonality for the following games and services:
Totocalcio: the collection occurs mostly during the period when the Italian soccer season takes place
(from September to June);
Traditional Lotteries: the distribution and sale of tickets is particularly concentrated during the
period of the annual draw of the Lotteria Italia (from September to January);
Car Road Tax:
the regulations;
normally, collection peaks correspond with the four annual deadlines scheduled by
Sports Box Office: the sale of tickets coincides with the duration of the national soccer championship,
while the sale of season tickets is concentrated only during the summer months; and
RAI TV License Fee: collection peaks are noticed in correspondence with the deadline of the annual
payment of the fee (mainly in January).
Sources and Availability of Raw Materials
In the business in which Lottomatica operates, raw materials consist of the play slips and the paper
used for issuing the validation slips of the bets and the receipts of the services rendered by the terminal, as
well as the tickets for the traditional lotteries and instant lotteries.
The cost of these raw materials is not particularly significant, nor has Lottomatica experienced any
material price volatility.
153
Information Technology
A critical component of Lottomatica’s business operations is its expertise in developing,
implementing, and operating high volume, secure transaction processing systems. Lottomatica makes use
of highly effective system design, delivery and ongoing support operations; terminal installation and
maintenance, and hotline management and maintenance.
Lottomatica’s information technology systems are designed to work together seamlessly within the
relevant network to manage and deliver content in all of Lottomatica’s businesses.
Lottomatica’s computer and information technology network is a valuable asset to Lottomatica and it
is the primary factor in the development of the various business activities.
Ongoing development and adaptation of Lottomatica’s information technology is required to meet its
business needs. In the past few years, a number of innovations have been carried out throughout the entire
structure, both to accommodate the new business activities and to improve the degree of reliability and
performance of the pre-existing ones.
In May 2005, the migration of electronic top-up services for pre-paid mobile telephones from Lotto
terminals to POS terminals was completed. The migration of all other services from Lotto terminals to
POS terminals is nearly complete as well, with the exception of car road tax processing services, which
Lottomatica hopes to migrate in the near future. The development of the alternative network offers the
opportunity for the end-user to pay not only with cash but also with debit cards.
The migration has allowed Lottomatica to operate a different network from Lotto. POS terminals
have substantially lower installation costs, when compared with Lotto Terminals. This makes it possible for
Lottomatica to provide services to outlet categories for which the installation of a Lotto Terminal would
not be economically viable.
The business information technology infrastructure of Lottomatica is based on three Data Centers
and on an IP Virtual Private Network that connects approximately 77,000 points of sale with approximately
133,000 terminals.
In order to better understand the characteristics of the current network architecture and the dynamics
of this evolution, the following is a description, by line of business, of infrastructure underlying each line of
business.
Lotteries
Lotto
The Host Area is currently based on three DPCs, one of which handles disaster recovery (Milan) and
two processing centers (Rome and Naples) which host the systems and applications that supply the
services. Every production DPC manages 50% of the active Lotto terminals and is interconnected to the
other DPC and to the disaster recovery center through a complete-link, wide-band network infrastructure.
The Rome DPC is connected to equipment located at the Direzione Generale dei Monopoli di Stato, the
Ispettorati Compartimentali dei Monopoli di Stato and the Commissioni d’Estrazione (draw commissions).
Communication Technology provides the link between Lotto Terminals located at Lotto points of sale
and the appropriate DPC, as well as between the DPCs. Automated recovery mechanisms have been
implemented to allow the system to overcome many component malfunctions.
The entire network infrastructure for Lotto business is designed on three logistical levels:
• complete wide-band linkage between the DPCs with 34 Mbps circuits;
• wide-band backbone network for implemented collections with the use of two different operators
with 2—34 Mbps circuits; and
• more than 40,000 local loops that link the collection points (ISDN, RTG and xDSL).
154
The telecommunication system also carries out a role of fundamental importance in the case of
Disaster Recovery because, by creating alternative paths and new links, it allows the prompt replacement
of elements of the telecom network that are made unavailable due to natural calamities or other fortuitous
events.
Two main suppliers provide the telecommunication service:
• Telecom Italia (approximately 18,000 local loops + collection backbones); and
• B.N.L. Multiservizi (approximately 22,000 local loops + collection backbones) that avails itself of
the BT-Albacom network.
Lottomatica has initiated arbitration proceedings against B.N.L. Multiservizi regarding a service
interruption on June 18, 2005. See ‘‘—Legal Proceedings’’.
During 2005 Lottomatica activated its first xDSL local-loops and currently has 3,000 xDSL local-loops
activated. Lottomatica expects to convert a total of 14,000 local loops to xDSL and Telecom Italia has
agreed to provide Lottomatica with up to 18,000 xDSL local loops.
As of December 31, 2005, approximately 39,000 terminals have been installed at approximately 34,500
tobacconists all of which have MAEL technology—Tecnost Olivetti.
In March 2006, Lottomatica completed a project to replace approximately 33,000 M320 and M350
terminals with new M370e terminals.
Sports Pools and Other Pari-Mutuel Betting
Handling almost all of the Sports Pools and Other Pari-Mutuel Betting wagers, the core system
(national totaliser) is located at Sogei, while the host equipment used by the Consorzio Lottomatica Giochi
Sportivi, in addition to being the collection front-end of the offices linked to the network of the
Consortium itself, manages the administrative and financial aspects, accounting and point of sale billing
activities.
The telecommunication network used for Sports Pools and Other Pari-Mutuel Betting is characterised
by the same architectural logic as the telecommunication network used for Lotto, but is separate from the
latter in that it uses identifiable dedicated resources. All of the approximately 6,000 local-loop circuits used
in the networks belong to Telecom Italia.
In 2004, the terminals that collected the Sports Pools and Other Pari-Mutuel Betting wagers were
separated from those of Lotto by a new software platform.
For the operation of Instant and Traditional Lotteries, the Consorzio Lotterie Nazionali uses core
systems with software, developed by their member company Scientific Games International Inc.
The Lotto, Sports Pools and Other Pari-Mutuel Betting, and Services networks and terminals are used
to scan and validate Instant and Traditional Lotteries tickets.
Gaming Machines
Core systems for Gaming Machines use software developed by Lottomatica for the information
technology management of Gaming Machines.
The SAP technological platforms and, in particular, the ERP and CRM modules, are used in order to
make the management of the contractual relationship with the various operators involved in this business
(concessionaires, operators and proprietors of the establishments where they are located) more efficient—
on the technical, bookkeeping and administrative levels.
155
The connectivity that provides the link between the Host and the gaming equipment (amusement with
prize machine) located at the stores is based on two structures developed with the Telecom Italia and Wind
operators.
Today these structures, through the use of point of access modules developed and with different
technologies, make it possible to reach more than 10,000 amusement with prize machines in the different
wireline or wireless modalities, providing a high degree of flexibility with regard to the various needs of the
businesses where the Gaming Machines are located.
Services
The Services business network information technology structure uses POS terminals with point of sale
technology installed at approximately 55,000 points of sale. All top-up (both commercial and processing)
and payment services are provided by these terminals.
In addition to POS terminals the stamp duty service is provided through a Lis Printer. At the moment
approximately 22,000 Lis Printers have been installed, comprising 18,000 Lis Printers installed during 2005
and 4,000 Lis Printers installed during 2006.
Car road tax processing services are still provided through Lotto Terminal and technology platform.
Both POS terminals and Lis Printers are connected to a service dedicated data center in Milan. Each
terminal connects to the data center servers through a dial-up connection.
Efficiency
Recent information technology projects, have been focused on developing a standards-based
information technology architecture, which makes it much easier to incorporate third-party solutions. This
improves the ability of Lottomatica’s information technology architecture to adapt to change and to evolve
in order to better meet new market needs. In particular it provides:
• flexibility: possibility of using cross-border applications that are part of business functionality
independent of the technology platform (service oriented architecture);
• cost development: reduction in costs for software development;
• cost effective maintenance: up-to-date tools for monitoring, development, testing, and training;
• profiling: management of user profiles that access only a sub-set of services;
• optimisation: keeping system resources focused on core transactions;
• integration: introduction of tools for integrated service management;
• multichannel: the possibility of providing the same services on different devices; and
• the development of web-based technologies, which will permit cost reduction for software
distribution and configuration management.
Reliability
Lottomatica believes that the current technology is highly reliable and provides essential continuity of
services.
In particular, for Lotto core systems, the Stratus systems are used, which are classified as faulttolerance technology able to guarantee service availability at greater than 99.995%. The reliability of the
entire service is also enhanced by the use of automated remote telediagnosis procedures which are
designed to detect major terminal malfunctions and notify in real time the people in charge of servicing the
terminals.
156
December 31, 2004
Statements of Reconciliation to IFRS (Continued)
(All amounts in thousands of Euro, except as otherwise indicated)
CONSOLIDATED IFRS BALANCE SHEETS AS OF JANUARY 1, 2004 AND DECEMBER 31, 2004,
CONSOLIDATED IFRS NET DEBT POSITION AS OF JANUARY 1, 2004 AND DECEMBER 31, 2004
AND NOTES TO THE SIGNIFICANT IFRS ADJUSTMENTS AND RECLASSIFICATIONS
The differences arising from the adoption of IFRS as compared to previous Italian accounting
standards, as well as the options that were been made by Lottomatica within the scope of the accounting
options provided for under IFRS described above, required the restatement of accounting data prepared
in accordance with the previous Italian regulations on financial statements and the computation of the
related effects on shareholders’ equity and on the net indebtedness of the Group.
Below are shown:
• summary statement reporting consolidated balance sheet at the transition date (January 1, 2004),
restated using the principle of ‘‘current and non-current’’ assets and liabilities;
• summary statement reporting consolidated balance sheet as of December 31, 2004, restated using
the principle of ‘‘current and non-current’’ assets and liabilities;
• statement of reconciliation of net financial indebtedness prepared using the previous accounting
standards and prepared in accordance with IFRS as of January 1, 2004, and December 31, 2004.
Change in consolidated Group
As of January 1, 2004
In accordance with IAS 27, Lotto do Brasil, Lottomatica Argentina, Twin, Lis Finanziaria, Consorzio
Lotterie Nazionali and Lottolatino Venezuela have been included in the scope of consolidation, while they
were not included in the scope of consolidation under Italian accounting standards, in that they were not
significant or, as in the case of Lis Finanziaria, because it was involved in different business activities. The
effects of this accounting treatment are reported in the column ‘‘Change in consolidation area’’, which
include the adjustments (A/ 350) and reclassifications that have been made for IFRS purposes. The IFRS
adjustments mainly refer to the reversal of intangible assets that did not have the requisites required by
IAS 38.
In accordance with IAS 27, Lotto do Brasil, Lottomatica Argentina and Lis Finanziaria have been
included in the scope of consolidation as of December 31, 2004, which were not included in the scope of
consolidation under Italian accounting standards. The effects of this accounting treatment are reported in
the column ‘‘Change in consolidation area’’, which include the adjustments and reclassifications that have
been made for IFRS purposes. It should be noted that Consorzio Lotterie Nazionali was consolidated for
the purpose of Italian accounting standards as of December 31, 2004, while Twin and Lotto Latino
Venezuela have been liquidated.
Discontinued operations
As of January 1, 2004
The equity investment held in Global Bingo Corporation (‘‘GBC’’), consolidated for the purposes of
Italian accounting standards as of December 31, 2003, and sold on June 28, 2004, has been treated,
A-69
Intellectual Property
The Lottomatica Group is the holder of the following trademarks, all registered in the Republic of
Italy:
Lottomatica Ownership
Trademark
Expiration
‘‘Gruppo Lottomatica Giochi e Servizi’’ * .
‘‘Lottomatica’’ . . . . . . . . . . . . . . . . . . . . .
‘‘Lottomatica Sistemi’’ . . . .
‘‘Lottomatica Italia Servizi’’ .
‘‘Lottomatica International’’
‘‘Gioco del Lotto’’ . . . . . . .
‘‘Lotto telefonico’’ . . . . . . .
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‘‘Lotto Tel’’ (Etichetta a colori) . . . . . . . . .
‘‘Lottostadio’’* . . . . . . . . . . . . . . . . . . . . .
‘‘Quizzo Lotto’’* . . . . .
‘‘Progetto Mosè’’ . . . . .
‘‘Mr. Ambo’’ . . . . . . . .
‘‘Cinquinotto’’ . . . . . . .
‘‘Il Fortunello’’ . . . . . . .
‘‘Scrigno della Fortuna’’
‘‘Busta della Fortuna’’ . .
‘‘Datti un 5’’* . . . . . . . .
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‘‘Gioca Rigioca’’* . . . . . . . . . . . . . . . . . . .
‘‘Palalottomatica’’* . . . . . . . . . . . . . . . . . .
‘‘Lottambuli’’* . . . . . . . . . . . . . . . . . . . . .
July 27, 2011 (figurative)
November 13, 2006 (denominative)—February 27, 2015
(figurative)**
August 11, 2009 (figurative)
January 10, 2010 (figurative)—January 12, 2010
(figurative)—January 12, 2010 (denominative)
January 12, 2010 (figurative)
September 25, 2012—September 25, 2012 (both
figurative)
February 28, 2011 (figurative)
September 24, 2009 (figurative)
November 22, 2006 (denominative)
April 21, 2007 (denominative)
April 21, 2007 (denominative)
December 16, 2015 (denominative)—December 2, 2015
(figurative)
December 5, 2015 (denominative)—December 7, 2015
(figurative)
July 11, 2013 (figurative)—June 24, 2013 (denominative)
July 23, 2014 (denominative)
*
These trademarks have been only deposited and Lottomatica is waiting for their registration.
**
Lottomatica has filed a request of renewal.
158
Lis Ownership
Trademark
Expiration
‘‘Il comune sotto casa’’ (generico) .
‘‘Il comune sotto casa’’ (Comune di
‘‘Il comune sotto casa’’ (Comune di
‘‘PuntoLis’’ . . . . . . . . . . . . . . . . . .
‘‘Cartapuntolis’’ . . . . . . . . . . . . . .
‘‘Pagolis’’ . . . . . . . . . . . . . . . . . . .
‘‘Cartalis’’ . . . . . . . . . . . . . . . . . . .
‘‘Lispoint’’ . . . . . . . . . . . . . . . . . .
‘‘Cartapagolis’’ . . . . . . . . . . . . . . .
‘‘Lis Net servizi on line’’ . . . . . . . .
......
Roma)
Napoli)
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June 8, 2011 (figurative)
August 9, 2014 (denominative)
March 24, 2009 (figurative)—March 24, 2009
(figurative)
Consorzio Lotterie Nazionali Ownership
Trademark
Expiration
‘‘GRATTA E VINCI!’’* . . . . . . . . . . . . . . . . . . .
‘‘BATTI IL BANCO’’* . . . . . . . . . . . . . . . . . . . .
‘‘UNDUETRIS’’* . . . . . . . . . . . . . . . . . . . . . . . .
‘‘DADO MATTO’’* . . . . . . . . . . . . . . . . . . . . . .
‘‘CACCIA AL BOTTINO’’* . . . . . . . . . . . . . . . .
‘‘THRILLER TRIS’’* . . . . . . . . . . . . . . . . . . . . .
‘‘TUTTI FRUTTI’’* . . . . . . . . . . . . . . . . . . . . . .
‘‘SETTE E MEZZO’’* . . . . . . . . . . . . . . . . . . . .
‘‘CONSORZIO LOTTERIE NAZIONALI’’ . . . . .
‘‘TUTTA FORTUNA’’* . . . . . . . . . . . . . . . . . . . .
‘‘STELLA STELLINA’’* . . . . . . . . . . . . . . . . . . .
‘‘LAS VEGAS’’* . . . . . . . . . . . . . . . . . . . . . . . . .
‘‘FAI SCOPA’’* . . . . . . . . . . . . . . . . . . . . . . . . . .
‘‘PORTA FORTUNA’’* . . . . . . . . . . . . . . . . . . . .
‘‘SUPER POKER’’* . . . . . . . . . . . . . . . . . . . . . .
‘‘MILIARDARIO’’* . . . . . . . . . . . . . . . . . . . . . .
‘‘LOTTERIA ITALIA’’* . . . . . . . . . . . . . . . . . . .
‘‘MEDAGLIA D’ORO’’* . . . . . . . . . . . . . . . . . .
‘‘LOTTERIE NAZIONALI’’* . . . . . . . . . . . . . . .
‘‘TUFFATI NELL’ORO’’* . . . . . . . . . . . . . . . . . .
All the trademarks owned by the Consorzio Lotterie
*
February 20, 2014
March 10, 2014
March 10, 2014
March 10, 2014
March 10, 2014
March 19, 2014
July 21, 2014
September 27, 2014
November 5, 2014
November 5, 2014
November 5, 2014
January 31, 2015
April 22, 2015
April 22, 2015
May 18, 2015
August 8, 2015
September 12, 2015
February 3, 2016
September 12, 2015
September 26, 2015
Nazionali are figurative.
These trademarks have been only deposited and the Consorzio Lotterie Nazionali is waiting for their registration.
On January 12, 2004, the AAMS granted, in exclusive, the license to use the following trademarks to
the Consorzio Lotterie Nazionali: ‘‘Gratta e Vinci’’, ‘‘Rischia e Vinci’’, ‘‘Scopri e Vinci’’, ‘‘Strappa e Vinci’’,
‘‘Cancella e Vinci’’, ‘‘Alza e Vinci’’, and ‘‘Rischiatutto’.
159
Totobit Informatica Ownership
Trademark
‘‘xgate’’ . . . . . . .
‘‘Totobit System’’
‘‘Puntomatiko’’ *
‘‘Ulisse’’ ** . . . .
Expiration
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‘‘Totobit Power Pos’’ * . . . . . . . . . . . . .
‘‘Totobit Informatica Software & Sistemi
‘‘X Gol’’ ** . . . . . . . . . . . . . . . . . . . . .
‘‘Totoservice’’ ** . . . . . . . . . . . . . . . . .
‘‘Telesystem’’ ** . . . . . . . . . . . . . . . . . .
‘‘Jet Mille’’ ** . . . . . . . . . . . . . . . . . . .
‘‘Lottobit’’ ** . . . . . . . . . . . . . . . . . . .
‘‘Totobit Informatica’’ ** . . . . . . . . . . .
‘‘X’’ ** . . . . . . . . . . . . . . . . . . . . . . . .
‘‘Puntoricarica’’ * . . . . . . . . . . . . . . . . .
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.......
S.p.A.’’*
.......
.......
.......
.......
.......
.......
.......
.......
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March 29, 2013 (figurative)—March 29, 2013
(denominative)
May 5, 2013 (figurative)
May 5, 2013 (denominative)
May 5, 2013 (denominative)
December 16, 2015 (figurative)
*
These trademarks have been only deposited and Totobit is waiting for its registration.
**
Totobit has filed a request of renewal.
Sed Ownership
Trademark
Expiration
‘‘Sed Multitel S.p.A.’’ * . . . . . . . . . . . . . . . . . . . . . .
*
This trademark has been only deposited and SED is waiting for its registration.
The Lottomatica Group is the holder of the following international trademarks:
Trademark
‘‘Scrigno della fortuna’’ .
‘‘Busta della Fortuna’’ . .
‘‘Lottomatica’’ . . . . . . .
‘‘Il Fortunello’’ . . . . . . .
State
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Andorra
Andorra
Andorra
Andorra
Expiration
December
December
December
December
The Lottomatica Group is the holder of the following European trademarks:
EU Trademark
Expiration
‘‘Lottomatica’’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
‘‘Lottomatica Giochi Sportivi’’ . . . . . . . . . . . . . . . . .
160
October 15, 2013 (denominative)
October 15, 2013 (figurative)
11, 2007
11, 2007
5, 2007
11, 2007
December 31, 2004
14. Other operating costs
The reclassifications, totalling A/000 427, referred to operational costs recognised under Italian
accounting standards under extraordinary items in the income statement.
15. Financial income and expenses
The reclassifications, totalling A/000 3,640, refer to:
—A/000 3,302, for which reference is made to point 13;
—A/000 336, for which reference is made to point 12.
16. Adjustments to financial assets
The amount of A/000 1,055 refers to:
—A/000 812 to capital gain on disposal of the equity investment held in Twin, which, under Italian
accounting standards, was entered under extraordinary items;
—A/000 243 regarding the loss reported by LIS Finanziaria. Specifically, LIS Finanziaria was valued at
equity for the purposes of the financial statements prepared according to Italian accounting
standards and consolidated for the preparation of the IFRS financial statements according to
IAS 27. As a result, the loss which, under Italian accounting standards was entered under Value
adjustments to financial assets, under IFRS has been entered in the income statement as a result of
consolidating the equity investment.
17. Income taxes for the period
Reclassification of A/000 684 mainly refers to expenses sustained by Lottomatica for joining the tax
amnesty for the 2001 financial year; this amount, given the nature of the expense, has been reclassified
under IFRS from extraordinary items to the tax items in the income statement.
18. Profit from assets held for sale or discontinuing operations
The financial result attributable to the transfer of the GBC equity investment, treated at January 1,
2004, according to IFRS 5, has been reclassified from extraordinary items to the appropriate item in
the income statement prescribed under international accounting standards.
A-82
December 31, 2004
Shareholders’
Equity as of
January 1,
2004
Change in
Shareholders’
Equity as of
December 31,
2004
Net Profit
2004
Shareholders’
Equity as of
December 31,
2004
Share attributable to the Parent
Company and Share attributable to
Minority Interests according to
Reclassified ITA Gaap . . . . . . . . . . .
Share attributable to Minority Interests
according to Reclassified Italian
Accounting Standards . . . . . . . . . . . .
403,498
230,931
61,198
292,129
Share attributable to the Group . . . . . .
399,680
(thousands of euros)
IFRS Adjustments to the ITA Gaap
items
—Reversal of Goodwill Amortisation . . . . .
—Reversal of start-up and expansion costs
—Reversal of research and development
costs . . . . . . . . . . . . . . . . . . . . . . .
—Reversal of patents and intellectual
property rights . . . . . . . . . . . . . . . . .
—Reversal of concessions, licenses and
trademarks . . . . . . . . . . . . . . . . . . .
—Reversal of fixed assets under
development and advances . . . . . . . . .
—Reversal of other Intangible assets . . . .
—Reversal of Intangible Assets
Amortisation . . . . . . . . . . . . . . . . . .
—Discounting-back of receivables . . . . . .
—Discounting back of the Staff Severance
Fund . . . . . . . . . . . . . . . . . . . . . . .
—Changes in provisions . . . . . . . . . . . .
—IFRS Adjustments for change in
consolidation area . . . . . . . . . . . . . .
—Change in profits (losses) carried
forward . . . . . . . . . . . . . . . . . . . . .
—Other adjustments . . . . . . . . . . . . . . .
—Tax effects . . . . . . . . . . . . . . . . . . . .
—Share attributable to minority interests . .
IFRS Share attributable to the Group . .
(3,818)
(5,487)
225,444
(479)
60,719
Notes
(5,966)
286,163
0
(6,960)
54,058
(1,847)
54,058
(8,807)
(B)
(C)
(189)
(6,411)
(6,600)
(C)
(5,556)
(982)
(6,538)
(C)
(98)
(237)
(335)
(C)
(395)
(1,680)
0
(4,062)
(395)
(5,742)
(C)
(C)
0
(156)
9,626
(38)
9,626
(194)
(C)
(E)
(359)
(643)
(275)
456
(G)
(I)
(384)
(K)
84
1,099
(384)
0
(31)
1,069
8,262
285
395,030
(760)
0
34
(18,252)
905
(760)
1,103
(9,990)
1,190
312,576
IFRS Share attributable to Minority
Interests . . . . . . . . . . . . . . . . . . . .
1,261
4,770
IFRS Shareholders’ Equity . . . . . . . . . .
396,291
317,346
A-84
(UU)(K)
(L)(A)
(D)(H)(K)
(F)
(W)
Relations with Lottomatica’s mid-level employees and production workers are subject to the national
collective bargaining agreement for the metalworks industry. On December 1, 2000, Lottomatica entered
into an agreement with its mid-level employees and production workers supplementing the terms of the
relevant national collective bargaining agreement. Relations with Lottomatica’s executives are subject to
the national collective bargaining agreement for executives in the metalworks industry.
Management believes that Lottomatica’s relationship with its employees is generally satisfactory.
During the last three years, Lottomatica has not experienced any strike that significantly influenced its
business activities.
Properties
Lottomatica’s headquarters are located at Rome at Viale del Campo Boario, 56/D.
As of the date of this Offering Circular, Lottomatica is using the following rented assets:
Lessor
Use of Property
Giorgia Nicolin . . . . . . Zonal Processing
Center (‘‘Cez’’)
VE—1st floor
Address of
Property
From
Contract Duration
To
Annual Rental Fee
(euro)
Via Pepe, 6—
Mestre (VE)
September 1,
2004
August 31, 2010 with
tacit renewal of 6 years
49,260.00 + Istat
revaluation
Paolo Greguoldo . . . . . Cez VE—2nd floor Via Pepe, 6—
Mestre (VE)
September 1,
2004
August 31, 2010 with
49,260.00 + Istat
revaluation
San Giulio D’Orta . . .
S.r.l.
December 1,
2004
November 30, 2010 with 60,000.00, 3,800
tacit renewal of 6 years (heat), a/c
(25,000)+ Istat
revaluation
Cez TO
Via S. Francesco
da Paola, 37—
Torino
Nedisa . . . . . . . . . . . Cez CA
Via Marconi, 29/31 May 19, 1992
Quartu Sant’Elena
(CA)
November 30, 2009
Gitex Gruppo . . . . . .
Imprenditoriale S.p.A.
Cez PA
Viale Regione
Siciliana, 7275—
Palermo
November 21, 2010 with 105,539.56 and
tacit renewal of 6 years 10,649.32
(parking) + Istat
revaluation
Gesfin Gestioni . . . . .
Informatiche,
Industriali e
Finanziarie S.p.A.
Cez RM
Via delle Strelitzie, January 1, 2004 April 30, 2012
35— Santa
Palomba— Rome
537,000.00
including services
for 2004 Euro
384,834.00 incl.
services for 2005,
Euro 232,668.00
for 2006 + Istat
revaluation
Fimper S.p.A. . . . . . . . Cez MI
Via Pisacane, 26—
Pero (MI)
October 1,
2004
September 30, 2010
with tacit renewal of
6 years
76,000.00 + Istat
revaluation
Telecom Italia S.p.A. . . Cez BA
Via S. Dioguardi,
1— Bari
October 1,
2004
Terminated effective
July 18, 2006
260,000.00
including
receptionist +
guard services
Fiart Cantieri . . . . . .
Italiani S.p.A.
Via Antiniana,
2/A— Pozzuoli
(NA)
November 21,
2004
November 20, 2010
348,072.00 + Istat
revaluation
including water,
heat, a/c, janitorial
services and
armed guard
Cez NA
163
November 22,
2004
130,000.00 + Istat
revaluation
Lessor
Use of Property
Address of
Property
From
Contract Duration
To
Annual Rental Fee
(euro)
Pension Fund for . . . .
Self-Employed
Surveyors
Cez FI
Via Volturno,
10/12— Sesto
Fiorentino (FI)
February 1,
2005
January 31, 2011 with
acit renewal of 6 years
81,408.00 + Istat
revaluation
Iniziative Sviluppo . . .
Immobiliare—Isim
S.p.A.
Offices
Viale del Campo
Boario, 56/D—
Rome
July 20, 2004
April 18, 2012
2,700,000.00 +
Istat revaluation
Edilcam . . . . . . . . . . Offices
Via Mosca, 36—
Rome
July 2, 1999
December 15, 2011
195,542.64 + Istat
revaluation
Foresti Collezioni . . .
S.r.l.
Via Benzoni
22A/24— Rome
August 1, 2005
July 31, 2011 with tacit
renewal of 6 years
96,000 + Istat
revaluation
Piazza Bottego 51,
Rome
July 1, 2005
April 30, 2006
72,540
Offices
Armando Testa S.p.A. . Offices
As of the date of this Offering Circular, PCC GS S.p.A. owns real property located at Zona
Industriale, 85050 Tito, Potenza, which PCC GS S.p.A. uses as office space.
As of the date of this Offering Circular, Totobit is using the following rented assets:
Lessor
Use of Property
Address of
Property
From
Contract Duration
To
Annual Rental Fee
(euro)
Areagroup Center . . .
S.r.l.
Offices
Via Pordenone,
8— Milan
November 1,
2004 (fourth
floor) and
January 1, 2005
(fifth floor)
December 31, 2010 with 137,815.00 and
tacit renewal of 6 years 151,930.00
(parking) + Istat
December 31, 2012 with revaluation
Areagroup Center . . .
S.r.l.
Offices
Via Pordenone,
8— Milan
December 1,
2005
November 30, 2011 with 67,510.00 and
tacit renewal of 6 years 2,400.00 (parking)
+ Istat
revaluation
Via Staro, 4—
Milan
April 14, 2000
April 13, 2010
Ing Lease S.p.A. . . . . . Offices
Italian Lire
3,414,659,000
(approximately
A1,463,000) for
the entire
duration of the
leasing
Obligation to Transfer Assets Upon the Termination of Lotto or Other Concessions
Upon termination of the Lotto concession, Lottomatica is required to transfer, free of charge, to the
AAMS, upon its request ownership of the entire automated systems. A similar requirement exists with
respect to the termination of the other concessions as well. For futher information see ‘‘Risk Factors—Risk
Factors Relating to Lottomatica—Lottomatica’s obligation to transfer assets upon the termination of Lotto
and other concessions could have a material adverse effect on its financial position and results of
operations’’ and ‘‘Regulatory Framework’’.
164
The following tables show the composition of the tangible fixed assets constituting property subject to
return free of charge at December 31, 2005 and 2004, and the related cumulative depreciation at those
dates.
Composition of tangible fixed assets
subject to return free of charge
Cost at
Cost at
December 31,
December 31,
2004
Total Change
2005
Value
Plant and machinery . .
Industrial equipment . .
Other property . . . . . .
Fixed assets in progress
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.
.
408,003
—
2,725
7,632
(49,825)
—
(717)
23,988
358,178
—
2,008
31,620
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
418,360
(26,554)
391,806
Composition of Cumulative Depreciation
related to the tangible fixed assets
subject to return free of charge
Cost at
Cost at
December 31,
December 31,
2004
Total Change
2005
Value
Plant and machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
355,810
—
2,636
(53,460)
—
(673)
302,350
—
1,963
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
358,446
(54,134)
304,312
Legal Proceedings
Lottomatica is subject to various legal proceedings arising in the ordinary course of its business.
Lottomatica has never been subject to bankruptcy proceedings. Except as set forth below, Lottomatica
believes that none of the legal proceedings to which Lottomatica is currently a party, if adversely decided,
are likely to have a material adverse effect on its business, financial condition or results of operation. A
number of proceedings discussed below were commenced against the Old and/or the New Lottomatica, for
the sake of clarity, Lottomatica, as successor to the Old and New Lottomatica, is referred to below as the
original party.
Lottomatica/AAMS Arbitration
On March 7, 2005, Lottomatica initiated arbitration proceedings against the AAMS, seeking a ruling
that the effective date of the Lotto concession is June 8, 1998 and that, as a result, the final expiration date
of the Lotto concession is June 8, 2016. See ‘‘Regulatory Framework’’. The AAMS has contended that the
expiration date of the concession is April 17, 2012.
On August 1, 2005, the arbitration panel rendered its decision, declaring that the legal effective date
of the beginning of the Lotto concession was June 8, 1998 and that, as a result, its final expiration date is
June 8, 2016. The arbitration panel determined that the ministerial decree granting the Lotto concession
required a determination by the Court of Justice that such concession did not violate European
Community Treaty provisions before the Lotto concession could have become effective. Such
165
LOTTOMATICA S.P.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
A)
B)
Report as of
31.12.2004
Report as of
31.12.2003
1,218,536
(26)
1,418
14,318
956,860
(80)
295
4,067
TOTAL A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,234,246
961,142
COSTS OF PRODUCTION
6)
Raw materials, secondary materials, consumables and goods . . . . . . . . . . . . . .
7)
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8)
Leases and rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
365,073
517,731
11,007
33,456
647,516
13,131
Total costs for goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
893,811
694,103
40,381
13,099
2,335
—
287
45,773
14,774
2,189
33
444
56,102
63,213
.
.
.
.
71,683
46,712
609
1,720
80,772
45,838
Total amortization, depreciation and write-downs . . . . . . . . . . . . . . . . . . .
120,724
126,636
VALUE OF PRODUCTION
1)
Revenues from sales and services . . . . . . .
2)
Change in inventories . . . . . . . . . . . . . .
4)
Capitalisation of internal construction costs
5)
Other earnings and proceeds . . . . . . . . . .
9)
Personnel
a) wages and salaries . . . . . .
b) social security contributions
c) staff severance fund . . . . .
d) pension and similar costs . .
e) other costs . . . . . . . . . . .
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.
.
Total personnel costs
10)
11)
Amortization, depreciation and write-downs
a) Amortization of intangible assets . . . . . . . . . . . . . . . . .
b) Depreciation of tangible assets . . . . . . . . . . . . . . . . . .
c) Other write-downs of fixed assets . . . . . . . . . . . . . . . . .
d) Write-down of current receivables and cash and equivalent
Change in inventories of raw materials, secondary materials,
goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provisions for risks . . . . . . . . . . . . . . . . . . . . . . . . . .
Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expenses . . . . . . . . . . . . . . . . . . . . . .
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.
.
consumables and
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
. . . . . . . . . . . .
.
.
.
.
(921)
2,677
5,530
13,076
166
11
1,094
4,044
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,362
5,315
TOTAL B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,090,999
889,267
DIFFERENCE BETWEEN PRODUCTION VALUE AND COSTS . . . . . . . . . . . . . . . . . . . . . . . .
143,247
71,875
12)
13)
14)
C)
.
.
.
.
FINANCIAL INCOME AND CHARGES
15)
Income from equity investments
b) in other companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16)
Other financial income
a) unconsolidated group companies . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d) others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
40,556
—
4,961
370
3,163
Total Financial Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,962
44,089
Interest payable and other financial charges
a) group companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
d) others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
(18,405)
(142)
(20,434)
Total Financial Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,407)
(20,576)
17)
17 - bis)
D)
.
.
.
.
26
Foreign exchange gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
166
883
TOTAL C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,279)
REVALUATIONS
18)
Revaluations:
19)
Write-downs:
a) of equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(243)
(3,402)
TOTAL D) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(243)
(3,402)
A-94
24,396
By order of July 24, 2004, the Civil Court of Rome dismissed the preliminary motion filed by
Lottomatica and LIS to suspend the proceeding. The next hearing before the TAR Lazio has not yet been
scheduled.
Lottomatica’s and LIS’s counsel believe that the claims of Ticket One are without merit.
Antitrust (Lottomatica—Sisal)
On July 18, 2003, the Italian Competition and Market Supervisory Authority (the ‘‘Authority’’)
commenced proceedings with respect to alleged collusion between Lottomatica and Sisal, a competitor of
Lottomatica in the game sector.
At its meeting of November 25, 2004, the Authority imposed on Lottomatica and Sisal fines of
A8 million and A2.8 million, respectively, which amounts were, in accordance with then current legislation,
proportional to their individual revenues. In addition, the Authority ordered Lottomatica and Sisal to
cease their anticompetitive behavior and send notices informing all the points of sale of their option to
conduct business with other operators for games other than Lotto, Instant and Traditional Lotteries and to
give the Authority notice of the measures taken by them within 90 days.
Lottomatica disputed the allegations made by the Authority and appealed the order with the TAR
Lazio, requesting, among other things, the suspension of the order.
At a hearing on March 2, 2005, the TAR Lazio rejected Lottomatica’s request for suspension of the
payment of the fine and suspended the remainder of the order because of the generic character of the
order given by the Authority.
In a decision published on June 15, 2005, the TAR Lazio dismissed the appeals by Lottomatica and
Sisal.
Prior to the publication of the decision, and with reservations, Lottomatica paid the fine and complied
with the order, to send to all the points of sale the communication requested by the Authority, indicating
the possibility to affiliate themselves with other operators for games other than Lotto and Instant and
Traditional Lotteries. In a notice dated October 25, 2005, the Authority acknowledged that Lottomatica
had complied with its order, specifying that: ‘‘The Authority will continue monitoring the progression of the
market concerned, reserving the right to intervene whenever subsequent violations of the regulations for
protection of the competition occur’’.
On November 30, 2005 the TAR Lazio issued the reasons for its decision. On March 29, 2006,
Lottomatica filed an appeal against the TAR Lazio’s decision before the Council of State.
Summons to Partners Formula Giochi
On October 26, 2005, the companies Karissa Holding S.A., Cored International S.A., Mr. Massimo
Maci and partners of Formula Giochi S.p.A. in liquidation (operating in the gaming collection and
wagering market) served a summons on Lottomatica and Sisal S.p.A. to appear by January 30, 2006 before
the Court of Appeal of Rome. The plaintiffs requested the assessment of the liability of Lottomatica and
Sisal S.p.A. for engaging in the anticompetitive conduct enjoined by the order of the Authority of
November 25, 2004, which conduct, the plaintiffs allege, was responsible for Formula Giochi S.p.A.’s
inability to enter the gaming and wagering market, with the consequent reduction in the business value of
the latter. The plaintiffs also requested that Lottomatica and Sisal S.p.A. be ordered to, jointly and
severally, pay directly to the plaintiffs, as well as to Formula Giochi S.p.A. damages totaling A37,207,000 in
the aggregate. Subsequently, Formula Giochi S.p.A. entered into a settlement agreement with Sisal to
settle the litigation accepting an amount of A500,000. Lottomatica has argued in its pleadings that the
plaintiff may not pursue the claim on behalf of Formula Giochi S.p.A. for damages in the amount of
A34,200,000 because Formula Giochi S.p.A. was compensated for any claims it may have had by the
167
A500,000 it received pursuant to the settlement agreement with Sisal. In a brief dated March 31, 2006,
Karissa Holding S.A. and others, by presenting their motions consequent to the occurred appearance of
Formula Giochi S.p.A., have acknowledged the entrance into a transactive agreement between the same
Formula Giochi S.p.A. and Sisal S.p.A. to define the lawsuit pending between the same parties. This
agreement foresees the recognition, in favor of Formula Giochi S.p.A., of an amount equal to A500,000. In
the brief regularly deposited by Lottomatica, Lottomatica asserted that Karissa Holding S.A.’s active
legitimacy no longer existed following the constitution of Formula Giochi S.p.A., as well as the nonadmissibility of the intervention of the same Formula Giochi S.p.A., besides all the already-formulated
prejudicial, preliminary and merit exceptions. With regard to this, it has been highlighted how the
transaction of A500,000 between Sisal S.p.A. and Formula Giochi S.p.A. against the latter’s demand of
A34,200,000 proves the unfoundedness of the demands advanced by Formula Giochi S.p.A.
The next hearing will be held on July 3, 2006.
Gaming Machines
SAPAR-Associazione Nazionale Apparecchi per Pubbliche Attrazioni Ricreative (‘‘SAPAR’’) and FM
S.r.l filed an appeal with the TAR Lazio requesting, among other things, the preliminary suspension of a
call for tenders organised by the AAMS in April 2004 to find concessionaires for the activation and
management of video lottery Gaming Machines. The annulment, after suspension, of the contracts that
were the subject of the call for tenders was also requested in a separate appeal to the TAR Lazio by a
group of Gaming Machine operators.
The call for tenders ended in June 2004 with the execution of concession agreements with ten
operators (including RTI Lottomatica).
By orders of June 9, 2004 and September 29, 2004, the TAR Lazio dismissed both appeals for
suspension of the tender.
In a decision rendered on May 31, 2005, the TAR Lazio definitively dismissed the adverse appeals for
the annulment of the tender.
On November 3, 2005, SAPAR and FM S.r.l. served notice of appeal with the Council of State,
repeating the causes of action that had been rejected by the TAR Lazio.
A second proceeding (Aliffi and others) was commenced before the Council of State, after having
been dismissed by Tar Lazio.
The SAPAR and FM S.r.l. and the Aliffi and others litigation proceedings have been consolidated and
the first hearing was held on March 14, 2006, when the Council of State suspended the proceeding as a
result of the merger of the New Lottomatica and FinEuroGames S.p.A. into NewGames S.p.A. on
December 20, 2005.
While Lottomatica cannot rule out the possibility that this appeal will be successful, Lottomatica
believes, upon advice of counsel, that there are reasons to believe that these appeals will likewise be
dismissed.
Lottomatica participated, as representative of a temporary joint venture, in the call for tenders
organised by the AAMS for the management of the national Traditional and Instant Lotteries. In a letter
dated July 30, 2001, the AAMS informed Lottomatica that the tender had been awarded to the aforesaid
joint venture.
168
The award of the concession to the joint venture has been the subject of a number of challenges by the
other participants to the tender that may be summarised as follows:
(a) appeal brought by Sisal: Sisal abandoned this suit at a hearing on April 10, 2002, thus this action
may be considered definitively concluded;
(b) appeal filed by Autogrill, GTECH Corporation, Oberthur Gaming Technologies S.a.S. and others
(collectively, ‘‘CONSIRIUM’’): CONSIRIUM abandoned its request for suspension at a hearing
on June 17, 2003. The appeal was then dismissed by the TAR Lazio. A hearing on the merits was
held on November 18, 2003 before the Council of State. During the hearing, the Council of State,
after taking note of the statement submitted by counsel for Lottomatica concerning the
intervening merger of the then Lottomatica into Tyche S.p.A. and the resulting change of the
corporate name of the entity surviving the merger to Lottomatica, declared the suit suspended
pursuant to Article 300 of the Italian Code of Civil Procedure. Subsequently, GTECH
Corporation and Oberthur Gaming Technologies S.a.S. served a notice of reinstatement. At a
hearing on October 28, 2004, GTECH Corporation and Oberthur Gaming Technologies
requested a stay of the proceedings;
(c) appeal of Snai, Venturini e C. S.p.A. (‘‘Venturini’’), Poste Italiane S.p.A. and Ente Tabacchi
Italiani S.p.A. (‘‘ETI’’): Poste Italiane S.p.A. and ETI intervened in an appeal filed by Snai and
Venturini with the purpose of contesting the award of the tender on July 30, 2001. At the hearing
on May 14, 2003, Poste Italiane S.p.A. and ETI requested a stay of the proceedings. On July 21,
2003, Snai and Venturini notified all parties involved that it was renouncing its appeal, making
the adjudication unappealable, after which the concession agreement was signed by the
Consorzio Lotterie Nazionali. In December 2002, the plaintiffs asked the AAMS to award the
contract to them. In a letter dated January 21, 2003, the AAMS responded that it could not award
the contract to them prior to resolution of the dispute. This letter was then challenged by Snai
and Venturini as grounds for the previously filed appeal, and by Poste Italiane S.p.A. and ETI in a
separate appeal. On July 17, 2003, Poste Italiane S.p.A. and ETI filed a motion to schedule a
hearing to resolve the dispute. On July 25, 2003, Poste Italiane S.p.A. and ETI requested that the
AAMS not render a decision until the administrative judge rendered his decision.
In the opinion of Lottomatica, upon advice of its counsel, the appeal by Poste Italiane S.p.A. and ETI
cannot have any effect on the award of the operation of Instant and Traditional Lotteries, which occurred
following the abandonment of the main action by Snai and Venturini e C. S.p.A. and is thus unappealable.
Further, the deadline has passed for Poste Italiane S.p.A. and ETI to contest the award of the operation of
the Instant and Traditional Lotteries to Consorzio Lotterie Nazionali, with the consequence that they
cannot continue with the lawsuit.
Interruption of Network Service
On June 18, 2005, there was an alternating current failure in Lotto collection service in almost all
terminals installed on the data transmission network managed by B.N.L.-Albacom. After a reconfiguration
of the network, completed during the night between June 18 and 19, 2005, the malfunction was corrected
and the transmission lines resumed their normal operation. The AAMS calculated the damage suffered at
approximately A7.5 million and filed a claim for damages on July 7, 2005. On August 12, 2005 Lottomatica
paid to the AAMS the amount claimed by the latter, while contesting the validity of the claim.
In addition, Lottomatica contested the network failure with supplier B.N.L. Multiservizi, while
reserving its right to enforce contractual penalties, claim compensation for additional damages incurred
and cancel the contract. B.N.L. Multiservizi rejected the claims of Lottomatica. On September 14, 2005,
following the payment by Lottomatica of approximately A7.5 million to the AAMS, Lottomatica requested
that B.N.L. Multiservizi reimburse it immediately for said amount. On November 2, 2005, Lottomatica
initiated arbitration proceedings against B.N.L. Multiservizi requesting termination of the contract due to
169
the material breach thereof by B.N.L. Multiservizi and compensation for all damages incurred, including,
without limitation, the A7.5 million paid to the AAMS. On November 23, 2005 B.N.L. Multiservizi
appointed its arbitrator and has rejected Lottomatica’s claim and requested an assessment of defaults
under the contractual obligations and that Lottomatica reimburse it for all costs incurred in the
proceedings, and seeks damages arising from Lottomatica providing additional services on the network
and introducing a third weekly drawing of Lotto without giving prior notice to B.N.L. Multiservizi. The
third and last arbitrator is expected to be appointed by the other two arbitrators jointly, or in the event that
they are unable to agree, by the President of the Court of Rome. As the two arbitrators appointed by the
parties have not reached an agreement concerning the designation of the third arbitrator, on April 20,
2006, Lottomatica appealed to the Court of Rome for the appointment of the third arbitrator, who carries
out the office of President. As of the Date of the Information Prospectus, the Court of Rome has not yet
provided to the appointment and therefore the board has not yet been constituted.
Appeal Concerning the Network Tender
On October 27, 2005, Rti Albacom—Fastweb (i) served an appeal on Lottomatica before the TAR
Lazio challenging the tender process relating to, and seeking the annulment, after suspension, of a contract
for data transmission services on the Lotto network operated by Lottomatica; and (ii) requested that
Lottomatica be sentenced to pay damages. Afterwards, the appellant withdrew its request for suspension
and annulment of the contract and has not yet requested a first hearing. On the date of this Offering
Circular the date for the hearing in this case has not yet been set.
Gaming Machines Activation Delay
The Gaming Machines concession provides that the holder of such concession may only commence
‘‘operating’’ its telematic networks after obtaining a ‘‘network operation decision’’ from the AAMS
following verification by the AAMS that such concession holder has completed the ‘‘network activation’’
phase by completing the telematic hook-up of the amusement with prize machines that are the subject of
the concession. On November 4, 2004, following testing of the network, issued to RTI Videolot
Lottomatica—now RTI Videolot—a temporary operating decision for its telematic network, which was
subject to confirmation, in accordance with paragraph 2 of Article 3 of the concession agreement, that
activation of the network had been completed.
The AAMS, by letter dated November 26, 2004, alleged that RTI Videolot failed to complete the
activation of the network in the time required by the Gaming Machines concession and ordered RTI
Videolot to pay liquidated damages pursuant to subsection b) of paragraph 2 of Article 27 of the Gaming
Machines concession in an amount equal to A20,000 per day commencing on November 4, 2004.
Lottomatica responded to the AAMS by letter signed jointly with eight other concession holders and a
subsequent preeminent pro veritate legal opinion disputing the applicability of the liquidated damages on
the basis that the delay was caused by technical and commercial factors beyond the control of the
concession holders and that the AAMS suffered no damages since it had demanded and received the tax
(Prelievo Erariale Unico) required by law on all amusement with prize machines, including those
amusement with prize machines that had not yet been connected to the network, and the Gaming
Machines concession fee, both predetermined lump sum amounts. As of the date of this Offering Circular
there has been no response or reply from the AAMS to that memorandum from the concession holders.
In light of the claims made by the AAMS, Lottomatica has, as a precaution, posted on its balance
sheet provisions in the amount of A2,400,000, comprising A1,220,000 for the portion of the claimed
liquidated damages relating to the period from November 5, 2004 to December 31, 2004, and A1,180,000
for the portion of the claimed liquidated damages relating to the period from January 1, 2005 to
February 28, 2005, the date that Lottomatica completed installation of the minimum number of
amusement with prize machines required by the Gaming Machines concession.
170
It should be pointed out that on the date of this Offering Circular the aforementioned outlay has not
been increased.
With a decree issued on February 2, 2006, AAMS adopted the network management decree in favour
of RTI Videolot. As a result of this decree, the revocation of the Video lottery Concession for delay in
activating the network is no longer possible, while the possibility of applying penalties for the delayed
claimed by AAMS cannot be excluded.
Except as specifically noted above, Lottomatica has not taken a reserve on its December 31, 2005
balance sheet in respect of any such litigations.
GTECH Shareholder Class Action Suits
In connection with the Acquisition, several purported class actions have been brought by shareholders
challenging the fairness of the merger consideration and adequacy of the disclosures to GTECH
stockholders. Lottomatica has been named (although not served) as a defendant in a shareholder class
action lawsuit filed on March 6, 2006, captioned Claire Partners, on behalf of itself and all others similarly
situated, v. W. Bruce Turner, Robert M. Dewey, Jr., Paget L. Alves, Christine M. Cournoyer, Burnett W. Donoho,
The Rt. Hon. Sir Jeremy Hanley KCMG, Philip R. Lochner, Jr., James F. McCann, Anthony Ruys, GTECH
Holdings Corporation, and Lottomatica S.p.A. and filed in the Rhode Island Superior Court of Kent
County. The complaint alleges, among other things, that Lottomatica aided and abetted the individual
defendants in the alleged breaches of their fiduciary duties. See ‘‘Business—GTECH—Legal
Proceedings—Other Legal Proceedings’’. However, the ritual summons has not been served to
Lottomatica.
the Merger will be presented for approval of shareholders, and to pay plaintiffs’ claim for attorneys’ fees
and expenses, up to U.S.$700,000. The settlement, which is subject to court approval and completion of the
proposed merger, will result in the dismissal of both lawsuits and the execution of releases by the plaintiffs
on behalf of themselves and the shareholder class they represent of all claims arising out of or relating to
the proposed Merger.
Environmental Matters
Lottomatica is not aware of any environmental problems that could reasonably be expected to have a
material adverse effect on Lottomatica’s ability to use its material tangible assets.
171
BUSINESS—GTECH
General
revenues in fiscal 2006 and approximately 5,300 employees on six continents. GTECH leverages its global
lottery experience and capabilities to offer a full range of game content and solutions and financial
transaction processing services.
GTECH is the world’s leading operator of highly-secure on-line lottery transaction processing systems,
doing business in 51 countries worldwide, and GTECH has a growing presence in commercial gaming
technology and financial services transaction processing. GTECH’s core market is the lottery industry, for
which it designs, sells and operates a complete suite of lottery-enabled point-of-sale terminals that are
electronically linked with a centralised transaction processing system which mediates lottery funds between
the retailer, where a transaction is enabled, and the lottery authority.
GTECH currently operates, provides equipment and services to, or has entered into contracts to
operate or provide equipment and services in the future to, 26 of the 43 on-line lottery authorities in the
United States, and 60 of the 122 international on-line lottery authorities. GTECH provides integrated
on-line lottery transaction processing solutions, services and products to governmental lottery authorities
and governmental licensees worldwide. GTECH offers its customers a full range of lottery technology
services, including the design, assembly, installation, operation, maintenance and marketing of on-line
lottery systems and instant-ticket support systems. GTECH’s lottery systems consist of numerous lottery
terminals located in retail outlets, central computer systems, systems software and game software, and
communications equipment which connects the terminals and the central computer systems.
Historically, the majority of GTECH’s lottery customers in the United States have entered into
long-term service contracts pursuant to which GTECH provides, operates and maintains the customers’
on-line lottery systems in return for a transaction processing fee typically expressed as an agreed
percentage of the gross lottery sales. Many of GTECH’s international lottery customers have purchased
their on-line lottery systems, although some, especially lottery authorities in Eastern Europe, Latin
America and Asia, have entered into long-term service contracts with GTECH. GTECH lottery service
contracts are typically at least five to seven years in duration for the basic contract term with three to five
years of extention options, resulting in total contract lives of eight to ten years.
In recent years, lottery authorities have recognised that by offering new games or products, they often
are able to generate significant additional revenues. An important part of GTECH’s strategy is to develop
new products and services for its customers in order to increase their lottery revenues. For example, during
fiscal 2006, GTECH introduced its new PICK’N PLAY category of online games that combines the appeal
of instant ticket games with the security and integrity of online games. A PICK’N PLAY player purchases a
theme-based play card which the retail clerk scans with a barcode reader. Upon scanning, the lottery
central system automatically produces an online game ticket which can be used to play the game on the
play card. GTECH has filed for patent protection for PICK’N PLAY in the United States and intends to
file the corresponding PCT (Patent Cooperation Treaty) application before May 12, 2006, in order to
preserve GTECH’s right to pursue patent protection internationally.
Other indicative products and services introduced in recent years to increase lottery revenues for
GTECH’s customers include HotTrax, Aladdin, the Doubletake game, e-scratch and GTECH’s family of
self-service terminals, including GamePoint which utilizes a video monitor to create Instant Ticket Vending
Machines (also known as Lottery Product Vending Machines or Instant Ticket Dispensing Machines;
‘‘ITVMs’’) designed, manufactured and marketed by Interlott Technologies, Inc. (‘‘Interlott’’), which
GTECH acquired during fiscal 2004, and, GTECH’s Altura family of terminals, the Altura Self-Service
Terminal or Altura SST. HotTrax is an exciting lottery game which utilizes a video monitor to create an
illusion of an auto race that is taking place in three dimensions. Aladdin is a credit card sized lottery ticket,
172
AT DECEMBER 31, 2004 AND 2003
‘‘Other intangible assets’’ total A/000 7,916 (A/000 4,845 as of December 31, 2003). The most important
increases over the financial year amounting to A/000 6,583 include A/000 4,000 for the development of the
‘‘intelligent network’’ connected to the Lotto Game and A/000 1,645 for investments for the restructuring of
Lottomatica’s new offices.
The change in consolidation perimeter refers to the deconsolidation of the Global Bingo Group’s
assets and the consolidation difference of the same, and the entry of Consorzio Lotterie Nazionali in the
scope of consolidation.
B II) TANGIBLE ASSETS
Net tangible assets amount to A/000 116,146 (A/000 152,032 as of December 31, 2003).
On 31.12.2003 Lottomatica took advantage of the regulations (Law No. 350 of December 24, 2003)
regarding the voluntary revaluation of business assets.
Accordingly, plant and equipment purchased in 1999 and 2000 have been revalued in the financial
statements as of December 31, 2003 via a reduction in the related accumulated depreciation by A/000
25,733. The additional value allocated to these assets reflects their ‘‘productive capacity’’ and their ‘‘actual
economic utility’’ to Lottomatica.
As already mentioned above, here again the changes in the consolidation perimeter essentially refer to
the deconsolidation of the GBC Group.
This item is made up as follows:
• Tangible assets B/000 54,998 (B/000 45,003 as of December 31, 2003).
These comprise the assets used at the Group’s offices and the equipment needed for normal
business activity; the individual categories of asset are analysed below, together with an indication
of the changes over the period.
Tangible assets—historical
cost (E/000)
1) Land and buildings
2) Plant and
equipment . . . . .
3) Industrial and
business equipment
4) Other assets . . . .
5) Fixed assets under
construction and
advances . . . . . . .
Changes over the period
Report as of
December 31,
Change in
2003
consolidation Purchases Write-downs Sales
.
10,316
(2,775)
35
—
.
50,707
(14,536)
15,385
(1,417)
.
.
431
5,473
(107)
(3,628)
3
900
(243)
.
3,296
(311)
166
TOTAL . . . . .
70,223
(21,357)
16,489
—
7,576
(613)
6,963
(1,009) 21,686
70,816
(25,047)
45,769
(2)
44
325
2,521
(239)
(1,115)
86
1,406
(2,377)
774
—
(25)
0
(1,660)
A-111
Report as of
Report as of
Other December 31, Accumulated December 31,
changes
2004
depreciation
2004
(1,034) 19,351
82,012
774
(27,014)
54,998
In August 2005, Loxley GTECH Technology Co. Ltd. (‘‘LGT’’) signed a five-year agreement to provide
equipment and services for a national on-line lottery in Thailand. GTECH owns a 49% equity interest in
LGT, a company that GTECH formed in joint venture with Loxley Public Company Limited, a leading
trading and telecommunications conglomerate in Thailand. Under the agreement, GTECH will be the
principal provider of technology and services to LGT, supplying to LGT a turnkey system, consisting of its
GTECH Enterprise Series solution and approximately 12,000 Altura terminals. LGT will, in turn, supply
equipment and integrated services to the Government Lottery Office of Thailand. This award followed a
competitive procurement. Sales for this national on-line lottery are expected to begin during the second
quarter of fiscal 2007.
In January 2006, GTECH signed a seven-year agreement with the North Carolina Education Lottery
to provide a fully-integrated on-line and instant ticket lottery system, lottery terminals, a wireless
communications network, Instant Ticket Vending Machines, management of warehousing and distribution
of instant tickets and other ongoing services. Under this agreement, GTECH partnered with Oberthur
Gaming Technologies Corporation for the printing of instant tickets. The agreement, under which sales
commenced on March 30, 2006, followed a competitive procurement process.
New Contracts with, and Extensions and Orders by, Existing Customers. Since the start of fiscal 2006,
GTECH has also been awarded new contracts by, or has received contract extensions or orders from, a
number of its existing customers.
In November 2005, following a competitive procurement, GTECH entered into a five-year integrated
services contract with the Arizona lottery authority to provide a new on-line lottery system, terminals and
communications network. Under the terms of the contract, GTECH has agreed to convert the Arizona
lottery authority’s existing system to its GTECH Enterprise Series technology platform, replace the
Arizona lottery’s existing terminal base with approximately 2,600 Altura terminals, and provide an
IP-based communications network.
In November 2005, following a competitive procurement, the New Jersey lottery authority named
GTECH as the apparent successful bidder to provide a new integrated on-line and instant ticket lottery
system, terminals and communication network. Sales under this new five-year contract, the terms of which
are being finalised, are expected to commence in June 2006. Implementation of this contract may be
suspended pending resolution of a challenge by one of GTECH’s competitors to the award of this contract
to GTECH.
In December 2005, following a competitive procurement, GTECH entered into a facilities
management contract with the Washington lottery authority under which GTECH is to provide a new
on-line and instant lottery system, terminals, communications network and ongoing services.
Several of GTECH’s fiscal 2006 contract developments related to sales of products and services. In
June 2005, GTECH entered into a new software license agreement and agreement to provide software and
hardware maintenance and support services to Societe de la Loterie de la Suisse Romade (‘‘LoRo’’), the
Swiss lottery authority. At such time, GTECH also entered into a product sale agreement with LoRo to
provide a new integrated on-line and instant ticket lottery system, Altura terminals and communications
network.
In July 2005, GTECH signed a five-year contract to provide ongoing software support and
enhancements, as well as certain general contractor services, to Westdeutsche Lotterie GmbH & Co.
OHG, the operator of on-line and instant-ticket lottery games in the German state of NordrheinWestfalen.
In July 2005, GTECH signed an agreement with the Spanish National Organisation for the Blind
(Organisacı́on Nacional de Ciegos Espanoles), which is authorised to administer lottery and wagering
games in Spain, to provide 5,000 additional handheld lottery terminals and to upgrade the authority’s
central system hardware.
174
In August 2005, GTECH entered into an agreement with the New Zealand Lotteries Commission to
provide a complete lottery system conversion, including a new integrated on-line and instant ticket lottery
system and new terminals, together with ongoing software support and terminal maintenance services.
In August 2005, GTECH received an order from the California lottery authority for a variety of lottery
products, including 550 additional Altura terminals, 700 Altura CVT terminals, 1,000 Instant Ticket
Vending Machines and other self-service lottery solutions.
During fiscal 2006, the Ohio lottery authority, Dansk Tipstjeneste (GTECH’s lottery customer in
Denmark), and Supreme Ventures Limited (GTECH’s lottery customer in Jamaica), each exercised
options to extend the terms of their respective on-line contracts with GTECH. In addition, in May 2005,
GTECH signed a new one-year contract with Caixa Economica Federal (‘‘CEF’’), the administrator of the
National Lottery in Brazil, which provides for GTECH to continue to operate the existing lottery and
financial transaction processing systems for CEF through May 14, 2006, or such later date as CEF may
elect.
During fiscal 2006, GTECH received several awards, or extensions of awards, to provide ITVMs in
addition to orders of ITVMs from the North Carolina and California lottery authorities in the context of
larger contract awards which are described above. In June 2005, GTECH entered into a product sale
agreement, following a competitive procurement, with the operator of the French National Lottery,
LaFrancaise Des Jeux (‘‘FDJ’’), to provide FDJ not less than 575 ITVMs and repair services. In June 2005,
GTECH entered into a two-year extension with the Ohio lottery commission for the lease of ITVMs.
Other Products And Services
Since the start of fiscal 2006, GTECH entered into a number of agreements, and announced a number
of other developments, respecting products and services outside of its traditional on-line lottery product
offerings.
Video Lottery And Gaming. In September 2005, following a competitive procurement, GTECH
entered into an agreement with the Pennsylvania Department of Revenue to provide a gaming central
control system to monitor and control up to 61,000 Gaming Machines which are to be installed at
approximately 14 venues. In December 2005, following a competitive procurement, GTECH entered into
an agreement to provide a video gaming monitoring system and site controllers for the Louisiana
Department of Public Safety and Corrections’ video gaming program.
New Product Offerings And Developments. In June 2005, GTECH entered into a joint venture
agreement with Viekkaus Oy, the operator of the Finnish national lottery, to develop and market
innovative new games and solutions for the lottery and gaming industries. The primary focus of this joint
venture, in which GTECH will hold an 81% equity stake, is the development of government-sponsored
games and solutions (with an emphasis on sports-betting games and solutions) over interactive channels
such as internet, mobile telephony and interactive television.
In November 2005, GTECH announced the successful integration of its Lottery Inside technology into
the Nucleus Point of Sale (‘‘POS’’) Platform offered by Dresser Wayne, a business unit of Dresser Inc. and
a pioneer in the retail fueling industry. GTECH’s Lottery Inside technology enables the sale of lottery
tickets through PC-based POS devices used by retailers, thereby obviating the need for retailers to
maintain dedicated lottery terminals.
GTECH reported several new product offerings and other developments during fiscal 2006 respecting
its video lottery and gaming businesses.
In May 2005, GTECH and Harrah’s Operating Company, Inc., a subsidiary of Harrah’s
Entertainment, Inc. (‘‘Harrah’s’’), entered into a strategic relationship whereby GTECH agrees to supply
175
Harrah’s properties with Gaming Machines, and the two companies agreed to work together to develop
new game content.
In August 2005, GTECH announced that its subsidiary, Spielo Manufacturing, Inc. had launched
WinWave, its next generation video lottery terminal, which was developed in consultation with lotteries to
meet specific needs of venues and players.
In September 2005, GTECH announced the development of its ‘‘Dynamic Floor Management
System’’, which permits operators of casinos to customise the game, denomination and mode of play for a
single machine or group of machines through commands and content sent via server.
In December 2005, GTECH signed a licensing agreement with Hasbro Properties Group, the
intellectual property arm of Hasbro, Inc., granting GTECH exclusive rights in the United States and
Canada to develop and market slot machines and video lottery terminals featuring THE GAME OF LIFE
property brand in the casino and government-sponsored environments. (THE GAME OF LIFE is a
trademark of Hasbro Properties Group Inc., and is license to GTECH by Hasbro Properties Group.)
Regarding its commercial services business, in July 2005, GTECH announced that it had successfully
integrated the commercial services payment capability of its Billbird subsidiary into its existing GTECH
Enterprise Series system. This solution, GTECH Enterprise SeriesCommercial Payments, offers
GTECH’s customers the opportunity to merge their lottery and commercial services operations.
On-line Lottery Business
On-line Lottery Contracts
Overview. GTECH generally conducts business under one of two types of contractual arrangements
which are described in more detail below:
Facilities Management Contracts. Under a typical Facilities Management Contract, GTECH
constructs, installs and operates the lottery system and retains ownership of the lottery system. These
contracts generally provide for a variable amount of monthly or weekly service fees to be paid to GTECH
directly from the lottery authority based on a percentage of a lottery’s gross on-line and instant ticket sales.
Product Sales Contracts. Under Product Sales Contracts, GTECH constructs, sells, delivers and
installs a turnkey on-line lottery system or lottery equipment and licenses the computer software for a fixed
price, and the lottery authority subsequently operates the lottery system.
The collection of lottery monies, the selection of winners, the financial responsibility for the payment
of prizes and the qualification of retail sales agents are usually the sole responsibility of the lottery
authority in each jurisdiction in which GTECH operates a lottery. The United Kingdom’s National Lottery,
Taiwan’s Public Welfare Lottery and the South African National Lottery provide important exceptions to
the general rule, in that in each case a licensee to whom GTECH supplies goods and services (rather than
the lottery authority) operates all aspects of the respective lottery with the exception of proceeds
allocation.
With respect to fiscal 2006, approximately 74% of GTECH’s revenues were service revenues earned
under its Facilities Management Contracts; approximately 10% of its revenues were product sales revenues
earned under Product Sales Contracts; and approximately 16% of its revenues were attributable to the
provision of non-lottery goods and services.
Facilities Management Contracts. GTECH’s Facilities Management Contracts typically require it to
construct, install and operate the lottery system for an initial term, which is typically at least five to seven
years, and usually contain options permitting the lottery authority to extend the contract under the same
terms and conditions for one or more additional periods, generally ranging from one to five years. In
addition, GTECH’s customers occasionally renegotiate extensions on different terms and conditions.
176
B) PROVISIONS FOR RISKS AND CHARGES
These amount to A/000 28,877 (A/000 6,724 as of 31.12.2003) and are made up as follows:
Provisions for risks and charges
Report
as of
31.12.2003
Values E/000
1) Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2) Provisions for taxes, including deferred taxes
3) Other provisions . . . . . . . . . . . . . . . . . . . . .
—) Business risks . . . . . . . . . . . . . . . . . . . . .
—) Others . . . . . . . . . . . . . . . . . . . . . . . . . .
Change over the period
Change in
consolidation
perimeter
Use
Increase
.
.
.
.
.
1,625
2,353
2,746
1,289
1,457
(125)
(1,316)
(12)
Total provisions . . . . . . . . . . . . . . . . . . . . . .
6,724
Report
as of
31.12.2004
(12)
—
10
(688) 7,622
(2,327) 18,989
(1,251) 17,535
(1,076) 1,454
1,510
7,971
19,396
17,573
1,823
(1,453)
(3,015) 26,621
28,877
• Pension and similar costs A/000 1,510 (A/000 1,625 as of 31.12.2003); this almost entirely comprises the
provisions made by the Parent Company, in accordance with a resolution of the ‘‘Remuneration
Committee’’, to cover the indemnities payable to certain Board members should their appointments
be terminated.
• Provision for taxes, including deferred taxes A/000 7,971 (A/000 2,353 as of 31.12.2003). This item mainly
refers to the Parent Company (A/000 7,546) and consists of A/000 7,153 for deferred taxes at a rate
of 37.25% of the share for the financial year of the advanced tax depreciation calculated on part of
the tangible assets entered into service in 2002, 2003 and 2004. The remainder (A/000 393) refers to
the A/000 269 for the fund allocated in 2002 to account for previous social security positions.
• Other provisions A/000 19,396 (A/000 2,746 as of 31.12.2003). Specifically:
Provision for business risks: A/000 17,573 (A/000 1,289 as of 31.12.2003).
This refers almost exclusively to Lottomatica S.p.A. (A/000 12,029) and Consorzio Lotterie
Nazionali (A/000 5,088). The most significant values refer to:
➤
A/000 10,740 allocated by Lottomatica during the financial year to cover costs related to
pending judiciary proceedings and contractual disputes;
➤
A/000 3,302 being the discounted-back value of the derivative instruments. The amount
relates to the sum set aside by Consorzio Lotterie Nazionali in relation to financial
instruments for foreign exchange losses which have not yet been realised.
➤
A/000 1,700 allocated for costs connected to the early termination of a number of
traditional lottery ticket supply contracts which may be charged to Consorzio Lotterie
Nazionali.
Others: A/000 1,823 (A/000 1,457 as of 31.12.2003). A/000 1,457 refer to Lottomatica and A/000
1,180 to the costs which may be charged to AAMS in the context of the video lotteries
concession.
A-121
➤
Due to other lenders A/000 2,736 (A/000 3,710 as of 31.12.2003). This item exclusively relates to PCC
Giochi e Servizi (A/000 211 for Efibanca loan) and TTS for financing transaction and to the
application of IAS 17 (A/000 2,516).
➤
Due to suppliers A/000 175,279 (A/000 117,330 as of 31.12.2003). This item comprises unpaid
supplier invoices recorded as of December 31, 2004, as well as invoices to be received and other
period costs to be settled. The payables are connected to the purchase of goods and services for the
activities of the financial year and investment programs under way.
The principal amount (A/000 125,669) reflects the liability of both Parent Company (A/000 91,481)
and LIS (A/000 34,188) to third-party suppliers.
The balance as of December 31, 2004 includes A/000 34,012 (A/000 18,805 as of 31.12.2003) relating
to Totobit group companies.
➤
Debt instruments show a balance equal to 0 (A/000 1,398 as of 31.12.2003) due to the change in the
scope of consolidation (deconsolidation of GBC).
➤
Due to unconsolidated subsidiary companies A/000 112 (A/000 10,955 as of 31.12.2003), mostly
relating to the subsidiary company Lis Finanziaria S.p.A., a company consolidated on an equity
basis. The significant decrease with respect to the previous financial year (A/000 10,843) refers to
the inclusion of Consorzio Lotterie Nazionali in the scope of consolidation.
➤
Due to parent companies A/000 19,245 (A/000 475 as of 31.12.2003).
These refer to A/000 18,653 for payables due to De Agostini S.p.A. for current taxes for the period;
indeed, following the resolution passed by the Board of Directors on September 9, 2004 and
approved by the Board of Directors of De Agostini S.p.A. on October 20, 2004, the companies
Lottomatica and Lottomatica Italia Servizi joined the ‘‘National Fiscal Consolidation’’.
➤
Taxes payables, A/000 13,338 (A/000 18,482 as of 31.12.2003). This figure mainly includes the
IRPEF(3) withholding taxes withheld by the Group from the remuneration of employees and
consultants for December 2004, as well as to V.A.T. payables, as well as the charges from benefits
set forth by Law No. 291/02 (tax amnesty), as well as IRAP payables for the financial year (A/000
9,183).
➤
Due to social security institutions, A/000 2,428 (A/000 2,717 as of December 31, 2003). This item
relates to the payables to social security institutions for withholdings charged to the Companies
with regard to wages and salaries paid in December 2004.
➤
Other payables A/000 210,649 (A/000 123,984 as of December 31, 2003). These principally include
amounts due to customers, as a consequence of the collection services provided by LIS,
Lottomatica and Consorzio Lotterie Nazionali and to employees for deferred remuneration (A/000
9,887). The most significant amount of A/000 106,143 refers to Consorzio Lotterie Nazionali and
relates to the sums to be paid to AAMS for sales of traditional and instant lotteries. As of
31.12.2004, the figure includes A/000 56,012 relating to collections for the Italia Lottery alone.
(3) [Imposta sul Reddito delle Persone Fisiche = Personal Income Tax].
A-123
Jurisdiction
Approximate
Number of Lottery
Current
Extension
Options*
of Current Contract
—
—
automatic
annual
renewal
Bermuda
—LILHCo . . . . . . . . . .
1
Brazil
—National Lottery(10) . .
—Minas Gerais . . . . . .
21,600
900
May 2000
October 1994
May 2006
November 2006
—
—
1,850
April 2004
December 2012
—
90
July 2005
November 2013
—
China
—Beijing Welfare
Lottery . . . . . . . . . . .
—Shenzen Welfare
Lottery . . . . . . . . . . .
Colombia
—ETESA(11) . . . . . . . . .
5,200
December 1999
January 2011
1 five-year
Czech Republic
—SAZKA . . . . . . . . . .
7,000
October 1992
December 2017
—
Ireland
—An Post Nat’l Lottery
Company . . . . . . . . .
3,400
June 2002
December 2008
(12)
Jamaica
—Supreme Ventures
Limited . . . . . . . . . .
840
November 2000
January 2016
—
Luxembourg(13)
—Loterie Nationale . . .
700
June 2001
October 2012
—
Mexico
—Pronosticos Para La
Assistencia Publica . .
7,100
(14)
(14)
(14)
Morocco
—La Societe de Gestion
de la Loterie
Nationale and La
Marocaine des Jeux
et Les Sports . . . . . .
1,400
August 1999
April 2009
1 one-year
Poland
—Totalisator Sportowy .
10,760
May 2001
May 2011
1 six-month
Slovak Republic
—TIPOS a.s. . . . . . . . .
1,700
March 1996
December 2011
—
South Africa(15)
—National Lottery . . . .
8,600
July 1999
April 2007
1 one-year
179
Jurisdiction
Approximate
Number of Lottery
of Current Contract
Current
Extension
Options*
Sri Lanka
—Mahapola Higher
Education Scholarship
Trust Fund . . . . . . . .
380
June 2004
September 2014
1 five-year
St. Kitts/Nevis
—LILHCo . . . . . . . . . .
45
April 1996
April 2016
—
St. Maarten/Saba/
St Eustatius
—LILHCo . . . . . . . . . .
40
January 1997
September 2007
1 ten-year(8)
Taiwan
—Taipei Bank(16) . . . . . .
5,500
November 2001
December 2006
—
Thailand
—Government Lottery
Office(17) . . . . . . . . . .
—
August 2005
(15)
—
Trinidad & Tobago
—National Lotteries
Control Board . . . . . .
560
July 1999
July 2006
1 three-year
Turkey
—Turkish National
Lottery(9) . . . . . . . . .
3,900
February 1996
(18)
(18)
Turks & Caicos
—LILHCo . . . . . . . . . .
10
October 2004
March 2015
1 ten-year(8)
United Kingdom
—The National
Lottery(19) . . . . . . . . .
28,000
January 2002
January 2009
—
Ukraine
—Ukrainian National
Lottery(20) . . . . . . . . .
2,950
April 2005
March 2013
—
U.S. Virgin Islands
—LILHCo . . . . . . . . . .
80
January 2002
January 2012
2 five-year
* Reflects extensions available to the lottery authority under the same terms as the current contract. Lottery authorities
occasionally negotiate extensions on different terms and conditions.
(1) Total does not include instant-ticket validation terminals or instant ticket vending machines.
(2) In November 2005, GTECH entered into a new five-year facilities management contract with the Arizona lottery authority.
Sales are expected to commence under this new contract during the second quarter of fiscal 2007.
(3) Operated by Lottery Technology Enterprises, a joint venture in which GTECH has a 1% interest, and to which GTECH supplies
lottery goods and services.
(4) In April 2006, after the close of fiscal 2006, GTECH was notified by the Idaho lottery authority of its intent to negotiate a new
online gaming system contract with another vendor, such contract to become operational upon the expiration of GTECH’s
existing contract.
(5) In November 2005, the New Jersey lottery authority named GTECH as the apparent successful bidder to provide services under
a new facilities management contract, the terms of which are being finalised. Sales under this new facilities management
contract are scheduled to begin in June 2006. Implementation of this contract may be suspended pending resolution of a
challenge by one of GTECH’s competitors to the award of this contract to GTECH.
180
(6) In January 2006, GTECH signed a seven-year facilities management contract with the North Carolina lottery authority. Sales
under this contract commenced on March 30, 2006.
(7) In December 2005, the Washington lottery authority and GTECH entered into a new six-year facilities management contract.
Sales under this contract are scheduled to begin upon expiration of the term of the current contract.
(8) The extension options for these contracts are at GTECH’s option, subject, in certain cases to compliance by GTECH with the
terms and conditions of the existing contract and/or review of certain financial terms.
(9) Under these contractual arrangements, the lottery authorities purchased the lottery system and related software license from
GTECH at the commencement of the respective contracts.
(10) Operated by GTECH Brasil Ltda. Holdings, S.A., a Brazilian company in which GTECH owns all voting stock. The term of
GTECH’s contract with Caixa Econômica Federal, the operator of the National Lottery, runs until May 2006.
(11) GTECH’s contract with the Colombia lottery authority is not a true facilities management contract in that title to the equipment
vests in the Colombia lottery authority at the end of the term.
(12) GTECH’s contract with the Ireland lottery authority may be extended for any period mutually acceptable to GTECH and the
Ireland lottery authority.
(13) The Luxembourg lottery authority can extend the software license granted by GTECH for up to 10 years after the end of the
initial term and any extensions of the contract.
(14) GTECH’s contract with the Mexico lottery authority is not a true facilities management contract. Title to all equipment, which
initially had been supplied under lease, has passed to the lottery authority pursuant to the terms of GTECH’s agreement.
GTECH provides maintenance and other services if requested by the lottery authority. In September 2004, GTECH signed a
contract with Pronósticos para la Asistencia Publica to provide equipment and services to a new on-line lottery system and
associated telecommunications network in Mexico. Implementation of this contract has been suspended pending resolution of
administrative and legal challenges by two of GTECH’s competitors to Pronósticos’s award to GTECH of this contract. In
September 2005 GTECH began (with delayed timelines) implementation of the September 2004 agreement.
(15) Operated by Uthingo consortium, in which GTECH is a 10% equity owner.
(16) Lottery Technology Services Corporation (‘‘LTSC’’), a consortium in which GTECH owns a 44% indirect interest, entered into a
Commission Agreement with the Bank of Taipei to operate the Taiwan Public Welfare Lottery. ACER, Inc. indirectly owns the
other 56% of LTSC. GTECH supplies terminals to LTSC and provides to LTSC central system maintenance, software support
and consulting services pursuant to service and supply agreements. In April 2006, GTECH announced that it had been notified
that another vendor had been selected to provide equipment and services for a new online lottery gaming system upon the
expiration of GTECH’s contract in December 2006.
(17) In August 2005, Loxley GTECH Technology Co. Ltd., a joint venture in which GTECH owns a 49% equity interest, entered into
a five-year facilities management contract with the Government Lottery Office of Thailand.
(18) The term of the contract with the Turkey lottery authority renews for successive one-year extension terms unless either party
gives timely notice of non-renewal. In addition, the Turkey lottery authority has the option to assume responsibility for the
provision of certain lottery services at any time after the second anniversary of system start-up.
(19) Operated by Camelot Group plc, a consortium, on a facilities management basis.
(20) In August 2005, GTECH completed the sale of this system to its customer, the Ukranian National Lottery. GTECH continues to
provide software services to the Ukranian National Lottery under a software maintenance agreement and license.
Product Sales Contracts. Under Product Sales Contracts, GTECH constructs, sells, delivers and
installs turnkey lottery systems or lottery equipment and licenses the computer software for a fixed price,
and the lottery authority subsequently operates the lottery system. GTECH also sells additional terminals
and central computers to expand existing systems and/or replace existing equipment under Product Sales
Contracts.
In connection with its Product Sales Contracts, GTECH generally designs the lottery system, trains the
lottery authority’s personnel and provides other services required to make and keep the system
operational. GTECH also generally licenses its software to its customers for a fixed additional fee.
Historically, product sales revenues have been derived from the installation of new on-line lottery
systems, installation of new software and the sales of lottery terminals and equipment in connection with
the expansion of existing lottery systems. The size and timing of these transactions at times have resulted in
variability in product sales revenues from quarter to quarter. See ‘‘Management’s Discussion and Analysis
of Financial Condition and Results of Operations—GTECH’’.
181
Totobit. Compared to 2003, the change is almost entirely due to the entry of the Totobit Group in the scope
of consolidation.
Report as of
December 31, 2004
Report as of
December 31, 2003
(E/000)
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
52,410
29,596
7,774
22,345
38,613
35,792
1,698
318,121
637
314,635
202
2,647
—
—
1,388
9,994
70,993
25,697
8,236
15,846
33,329
16,859
1,228
246,761
594
243,119
230
2,818
218,924
1,647
7,996
(18,583)
3,899
(462)
6,499
5,284
18,933
470
71,360
43
71,516
(28)
(171)
0
(218,924)
(259)
1,998
TOTAL . . . . . . . . . . . . . . . . . . . . .
517,731
647,516
(129,785)
Cost for services
Network management . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . .
Office costs . . . . . . . . . . . . . . . . . . .
Assistance for bet collection points . .
Advertising costs . . . . . . . . . . . . . . .
Consultancy costs . . . . . . . . . . . . . . .
Corporate bodies . . . . . . . . . . . . . . .
Services provided . . . . . . . . . . . . . . .
—) Football Ticketing Service . . . .
—) Top-ups . . . . . . . . . . . . . . . . .
—) RAI television licences services
—) Car Road tax . . . . . . . . . . . . .
Subsidiary companies services . . . . . .
Payment of Bingo prizes/taxes . . . . . .
Banking costs and services . . . . . . . .
Other costs . . . . . . . . . . . . . . . . . . .
Changes
• Services. These amount to A/000 517,731 (A/000 647,516 as of December 31, 2003); the table sets out
a break-down by expenditure item with the variations compared with the previous financial year.
The most significant variations concerned:
the network costs for the technological innovation process begun in early 2003 by migrating the
data transmission systems to the IP (Internet Protocol) system, with significant savings;
assistance provided to bet collection points for business development and business volume
increase;
third-party services mostly concerning the implementation of new businesses started during the
financial year (national traditional and instant lotteries, entertainment games, new games
connected to Totocalcio, etc.);
telephone top-ups costs with collection volumes continuously increasing.
• Leases and rentals: A/000 11,007 (A/000 13,131 as of December 31, 2003). These are costs relate to
leases, rentals (cars and equipment) and royalties.
A-130
➤
Extraordinary charges of A/000 31,384 (A/000 94,250 as of December 31, 2003). The most significant
amounts refer to:
• A/000 9,000 as against the proceeding initiated by the Competition Authority against Lottomatica.
The Authority’s decision is currently under appeal;
• A/000 7,358 for the charges paid to Cirsa following the sale of the equity investment in GBC for the
cessation of the commitments undertaken by Lottomatica on the acquisition; the amount include a
capital loss of A/000 333 from the sale transaction;
• A/000 4,760 for the extraordinary allocation of funds to the provision for bad debts in relation to the
positions deriving from the acquisition of the Games division of EIS S.p.A.;
• A/000 2,898 for amounts to cover corporate restructuring charges and retirement incentives;
• A/000 2,730 for the assessment of costs not accrued to the financial year;
• A/000 1,417 for the sum set aside by Videolot Gestioni S.p.A. as against estimated costs for the
replacement of gaming equipment which, as a result of functional characteristics, may not prove
popular with players;
• A/000 613 for charges connected to the closure of operational activities in Venezuela;
• A/000 786 for charges sustained by Lottomatica, who took advantage of the tax amnesty procedure
provided by Law No. 289/02 for the financial year 2001.
INCOME TAXES FOR THE PERIOD
The estimated tax charge as of December 31, 2004 for the Lottomatica Group amounts to
A/000 29,863 (A/000 15,042 as of December 31, 2003) for current taxes, A/000 6,340 for deferred tax
liabilities (deferred tax assets of A/000 22,430 as of December 31, 2003) and A/000 13,097 for advance taxes.
Accordingly, the Consolidated Financial Statements as of 31.12.2004 show a tax charge of A/000 49,300
(A/000 7,388 as of December 31, 2003).
CONSOLIDATED NET INCOME AS OF DECEMBER 31, 2004
Consolidated net income amounts to A/000 61,198 (A/000 9,681 as of December 31, 2003) of which
A/000 479 (A/000 531 as of December 31, 2003) is attributable to minority interests.
A-135
OTHER INFORMATION
As required by Article 38, paragraph 1, of Legislative Decree No. 127/91, we inform you that:
• Personnel
The table below shows the average number of employees, analysed by category, of the companies
consolidated on a line-by-line basis:
Average employees for the period
Categories
Executives . . . .
Supervisors . . .
Office staff . . . .
Manual workers
2004 Period
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.
2003 Period
.
.
.
.
50.0
91.1
813.8
61.3
51.9
82.7
771.7
64.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,016.2
970.7
As to Lis Finanziaria, consolidated on an equity basis, the average number of employees, analysed by
category, is as follows:
Executives . . . .
Supervisors . . .
Office staff . . .
Manual workers
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1.00
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.00
6.00
• Remunerations paid to Directors and Statutory Auditors These amount to A/000 1,698 and are broken
down as follows:
—Directors’ remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—Statutory Auditors’ remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
A/000 1,225
A/000 473
The table annexed shows the remuneration due to Directors and Statutory Auditors as of
December 31, 2004 pursuant to Consob Resolution No. 11.520 of July 1, 1998:
A-136
Marketing of GTECH’s lottery products and services to lottery authorities outside of the United
States is often performed in conjunction with licensees and consultants with whom GTECH contracts for
representation in specific market areas. Although generally neither a condition of their contracts with
GTECH nor a condition of their contracts with lottery authorities, such licensees and consultants often
agree with GTECH to provide on-site services after installation of the on-line lottery system.
After the expiration of the initial or extended contract term, a lottery authority in the United States
generally may either seek to negotiate further extensions or commence a new competitive bidding process.
Internationally, lottery authorities do not typically utilise as formal a bidding process, but rather negotiate
proposals with one or more potential vendors.
From time to time, there are challenges or other proceedings relating to the awarding of lottery
contracts.
On-line Products And Services
A significant portion of GTECH’s revenues and cash-flow is derived from its portfolio of long-term
on-line lottery service contracts, each of which in the ordinary course of its business periodically is the
subject of competitive procurement or renegotiation. GTECH’s lottery operations are dependent upon its
continued ability to retain and extend its existing contracts and win new contracts.
GTECH’s lottery systems consist of lottery terminals, central computer systems, communications and
game software, and communications equipment which connect the terminals and the central computer
systems. The systems’ terminals are typically located in high-traffic retail outlets, such as newsstands,
convenience stores, food stores, tobacco shops and liquor stores.
GTECH’s on-line lottery systems control and perform the following functions: entry of wagers using a
terminal’s touch screen/keyboard or a fully-integrated contact image sensor reader; automatic auditing of
each wager for correctness by the originating terminal; encryption and transmission of the wager and
related data to the central computer installation(s); processing of each wager by the central computers,
including entry of the wager on redundant systems; transmission of authorisation for the originating
terminal to accept the wager and print a receipt or ticket, and performance of winning ticket identification
and validation; and administrative functions, including determination of prize pools and generation of
management information reports.
The basic functions of GTECH’s systems, which are listed above, as well as various optional or
custom-designed functions, are performed under internal controls designed for maximum security and
minimum processing time. Security is provided through an integrated system of techniques, procedures
and controls supported by hardware, software and human resources. Individual systems generally have
redundant capacity at multiple levels and sophisticated software to ensure continuous service to the
customer.
Terminals
GTECH designs, manufactures and provides the point-of-sale terminals used in its on-line lottery
systems. GTECH’s model GT-101TF terminals, introduced in 1985, and its model GT-401/OI terminals,
introduced in 1989, are installed to this day in several jurisdictions. GTECH’s Spectra terminal series
(GT-401/0M, 402/0M and 403/OM), first introduced in 1989, is distinguished by its modular internal and
external architecture.
GTECH’s ISYS terminal series (GT-501, 502 and 503), introduced during fiscal 1996, is an integral,
single-unit terminal that features modular subassemblies, high performance ticket printer and playslip
reader subassemblies, an easy-to-use design, and a host of new features and technologies.
185
During fiscal 1999, GTECH announced the introduction of the PlayerExpress terminal, which was
designed specifically for large retail environments, such as grocery stores, with numerous checkout lanes.
During fiscal 1999, GTECH also announced the launch of its Altura family of terminals. Altura, which
represents the initial offering of GTECH’s ninth generation of on-line lottery terminal, permits
applications to be written in the Java programming language, enabling the rapid development of a wide
variety of games that are compatible with numerous software environments. GTECH has supplied Altura
terminals to 23 of its customers with another 10 installations planned or underway.
The Altura LVT and Altura SST terminals are the newest additions to GTECH’s Altura family of
terminals. The Altura LVT, which features a compact platform, touch screen interface and expandable
configuration, is designed to meet the needs of retailers with low volumes of transactions. The Altura SST,
a self-service terminal, combines the functionality of ITVMs with the capability of selling on-line lottery
tickets through a touch screen interface.
During fiscal 2004, GTECH expanded its self-service terminal offerings with the completion of its
acquisition of Interlott, a leading provider of ITVMs for the worldwide lottery industry. Interlott’s EDS-Q
family of ITVMs offers flexibility and expandability (from a four to 24 game capacity) as well as the
industry’s first transaction processing connectivity to in-store lottery terminals and lottery authority central
systems.
During fiscal 2005, GTECH completed the acquisition of Spielo. GTECH believes that this acquisition
will further expand its terminal offerings. The Spielo family of terminals includes the Aura, a video lottery
terminal that features a high-resolution 18’’ flat screen color monitor, 16-bit digital stereo sound,
ergonomic design and powerful processor, and the Power Station 5, a video lottery terminal that is
designed to meet the needs of bar and restaurant venues.
During fiscal 2005, GTECH announced the development of GamePoint, its all-in-one instant and
on-line lottery terminal solution. The GamePoint terminal, which dispenses both instant and on-line
tickets, is completely self-contained and provides a secure and player-friendly opportunity for the sale of
instant and on-line lottery products.
During fiscal 2006, GTECH announced that its Spielo subsidiary launched WinWave, its next—
generation video lottery terminal, which was developed in consultation with lotteries to meet the specific
needs of venues and players.
GTECH is not dependent upon the use of its proprietary terminals and has the ability to integrate into
its on-line lottery systems qualified third-party terminals.
Software. GTECH designs and provides, or licenses from third parties, all applications solutions for
its lottery systems. GTECH’s highly sophisticated and specialised software is designed to provide the
following system characteristics: rapid processing, storage and retrieval of transaction data in high volumes
and in multiple applications; the ability to down-line load (i.e., to reprogram the lottery terminals from the
central computer installation via the communications system to add new games); a high degree of security
and redundancy to guard against unauthorised access and tampering and to ensure continued operations
without data loss; and a comprehensive management information and control system.
GTECH’s latest generation solution, the GTECH Enterprise Series, has an open architecture that
GTECH believes sets a new industry standard for the development, deployment, integration and support
of next-generation on-line lottery solutions, including those which permit sales of lottery products via a
secure infrastructure over the internet, without compromising the integrity of the games. The open system
architecture of the GTECH Enterprise Series allows lotteries to upgrade their lottery systems, and
integrate a broad spectrum of third party hardware and software solutions to achieve greater performance.
Central Computers. Each of GTECH’s lottery systems contains one or more central computer sites to
which the lottery terminals are connected. GTECH’s central computer systems are manufactured by
186
LOTTOMATICA S.p.A and Subsidiaries
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Month Period Ended March 31, 2006 and 2005 and the Year Ended December 31, 2005
(audited)
(All amounts in thousands of Euro)
Three months
ended
March 31, 2006
Year ended
Dec 31, 2005
Three months
ended
March 31, 2005
76,009
196,245
103,408
10,140
1,818
1,856
6,039
(36,357)
(34,582)
38,410
8,531
493
4,786
35,498
(82,013)
46,570
(41,749)
Cash flow from operating activities before changes in net
working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,922
201,950
118,480
Changes in net working capital . . . . . . . . . . . . . . . . . . . . . .
(7,376)
(11,209)
(55,826)
Net cash provided by operating activities [a] . . . . . . . . . . .
17,546
190,741
62,654
Cash flow used in investing activities:
Additions to property, plant and equipment . . . . . . . . . . . .
Additions to intangible assets . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposals of property, plant and equipment . .
(13,724)
(801)
654
(86,067)
(7,787)
2,556
(1,866)
(505)
988
Net cash used in investing activities [b], . . . . . . . . . . . . . .
(13,871)
(91,298)
(1,383)
Cash flow from operating activities:
Income before income taxes . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposal of property, plant and equipment . . . . .
Write-downs of property, plant and equipment . . . . . . . .
Other non-monetary charges . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow provided by (used in) financing activities:
Repayment of long—term debt . . . . . . . . . . . . . . .
Net change in short-term borrowings . . . . . . . . . . .
Dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from share capital increase . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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8.703
1,548
2.562
35.025
(150.000)
42.834
(67.983)
70.500
9.185
Net cash provided by (used in) financing activities [c] . . . .
69,995
(95,464)
(13,224)
Net increase in cash and cash equivalents [a + b + c] . . . .
73,671
3,979
48,047
120
120
32.408
(16.211)
2.987
Cash and cash equivalents at the beginning of the period . . .
Cash and cash equivalents at the beginning of the period—
merged companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
246,163
242,064
242,064
Cash and cash equivalents at the end of the period . . . . . . .
319,834
246,163
290,231
The amount paid during the current fiscal year, for taxes and interest were, respectively zero and
A/000 14.
B-3
UNAUDITED INTERIM CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Month Period Ended March 31, 2006
(All amounts in thousands of Euro)
Statements of shareholders’ equity for the three months ended March 31, 2005 and 2006
The accompanying statement of shareholders’ equity for the three months ended March 31, 2005,
which reflect the effects of the merger transaction of December 20, 2005, is provided to complete the
interim financial information.
Shareholder’s equity
Additional
Total
Total
Share
paid
Merger
Other
Retained shareholder’s minority
Capital in capital reserve reserves earnings
equity
interest
Balance at January 1, 2005 . . . .
120
(46)
Merger effects . . . . . . . . . . . . . 88,889 271,609 22,737
Other movements . . . . . . . . . . .
(9,765)
Net income for the three month
period . . . . . . . . . . . . . . . . .
Balance at March 31, 2005 . . . . 89,009 261,844 22,737
74
74
46
383,235
2,249
5,720 388,955
2,249
61,216
61,216
11,968 61,216
446,774
11,968
443
Balance at January 1, 2006 . . . . 89,009 261,844 22,737 18,713 112,391
.
.
.
(833)
504,694
61,659
6,163 452,937
Shareholders’ equity
Additional
Total
Total
Share
paid in
Merger Other Retained shareholders’ minority
capital
capital
reserve reserves earnings
equity
interest
Other movements . . . . . . . . . .
Share capital increase . . . . . . .
Stock option reserve . . . . . . . .
Net income for the three month
period . . . . . . . . . . . . . . . . .
Total
Equity
Total
Equity
7,561 512,255
(833)
37,478
109
1,333
500
37,478
109
38,449
38,449
2,977
41,426
Balance at March 31, 2006 . . . . . 91,571 296,760 22,737 17,989 150,840
579,897
2,562
34,916
109
.
11,871 591,768
B-4
infrastructure. See ‘‘—Legal Proceedings—Brazilian Legal Proceedings’’. In addition, GTECH is party to
agreements with more than 550 retailers in Chile to provide electronic bill payment services at retail
outlets throughout the country.
During fiscal 2003, GTECH entered into an agreement with Supreme Ventures Limited, a licensee
operating certain on-line games in Jamaica, and Mossel Jamaica Limited, a cellular telephone service
provider in Jamaica (‘‘Digicel’’) to provide Digicel with a non-exclusive distribution network for the
electronic sale of personal identification numbers for cellular phone usage in Jamaica, thus providing
customers in Jamaica with the ability to place cellular telephone calls using purchased minutes. During
fiscal 2004, GTECH acquired a controlling equity position in PolCard, the leading debit and credit card
merchant transaction acquirer and processor in Poland, and was awarded a two-year contract extension by
the Idaho Department of Fish and Game to continue to provide products and services to operate Idaho’s
fish and game licensing system through December 31, 2006.
During fiscal 2005, GTECH completed the acquisition of BillBird S.A., the leading provider of
electronic bill payment services in Poland, and during fiscal 2006 GTECH announced that it had
successfully integrated the commercial services payment capability of its BillBird subsidiary into its existing
GTECH Enterprise Service system, thereby offering GTECH’s customers the opportunity to merge their
lottery and commercial services operations.
During fiscal 2006 GTECH leveraged its existing lottery infrastructure in Colombia and the United
States Virgin Islands to provide the consumers in those jurisdictions non-lottery commercial services,
including pre-paid mobile telephone ‘‘top-up’’ services.
Product Development
GTECH devotes substantial resources in order to enhance its present products and systems and
develop new products. In fiscal 2006, GTECH spent approximately U.S.$49.9 million on research and
development, as compared to U.S.$52.6 million in fiscal 2005, and U.S.$57.3 million in fiscal 2004.
Intellectual Property
Historically, GTECH generally has not sought to obtain patents on its products, believing that its
technical ‘‘know-how’’, trade secrets and the creative skills of its personnel would be of substantially more
importance to its success than the benefit which patent protection ordinarily would afford. As GTECH
continues to advance the development of new technological solutions, it has decided to pursue
comprehensive intellectual property protection, including patents where appropriate, for these solutions.
GTECH is currently pursuing protection of some of its newest advances in technology and gaming,
including its GTECH Enterprise Series, a unique, fully-open, integrated solution which includes the
ability to distribute lottery games via a secure infrastructure over the internet without compromising the
integrity of the games. GTECH has obtained patent protection in certain of its key business methods in the
areas of infrastructure systems, terminal improvements and creative game design. Many of GTECH’s
products bear recognisable brand names that it either owns or has the right to use pursuant to license
agreements. GTECH owns trademark registrations in the United States and in foreign countries and uses
other marks that have not been registered. GTECH also licenses certain trademarks, such as THE GAME
OF LIFE, MONOPOLY, and BATTLESHIP from third parties. THE GAME OF LIFE, MONOPOLY
and BATTLESHIP are trademarks of Hasbro, Inc. and are licensed to us by Hasbro Consumer Products
and Hasbro Properties Group.
Production, Assembly and Components
GTECH purchases most of the parts, components and subassemblies necessary for its terminals and
other products from outside sources. GTECH assembles these parts, components and subassemblies into
finished products in its manufacturing facility where it also conducts all of its quality testing. GTECH
189
offers central systems manufactured by Hewlett-Packard Company, Stratus Computer, Inc. and IBM
Corporation for its lottery systems. GTECH does not manufacture any central system components.
GTECH has approximately three material sole source vendors. The loss of any of those vendors might
result in material additional costs and/or manufacturing delays.
Backlog
The backlog of GTECH’s orders for sales of its products, which are supported by signed contracts with
its customers and which are believed by GTECH to be firm, amounted to approximately U.S.$189.2 million
as of February 25, 2006, as opposed to a backlog of approximately U.S.$143.7 million as of February 26,
2005. Approximately U.S.$92.2 million, or 48.7% of the backlog at February 25, 2006, is expected to be
filled during fiscal 2007.
Competition
The on-line lottery industry has faced increased competition in recent years for the consumers’
entertainment dollar, including from a proliferation of destination gaming venues, and an increased
availability of internet gaming opportunities. In addition, in recent years, there has been increased
competition among domestic and international participants in the on-line lottery industry. The on-line
lottery business is highly competitive in the United States and internationally. Both in the United States
and internationally, price is an increasingly important, but usually not the sole, criterion for selection.
Other significant factors that influence the award of lottery contracts are: the ability to optimise lottery
revenues through technical capability and applications knowledge; the quality, dependability and upgrade
capability of the system; the marketing and gaming experience, financial condition and reputation of the
vendor; and the satisfaction of other requirements and qualifications that the lottery authority may impose.
During fiscal 2006, GTECH’s principal competitors in the on-line lottery business (and the number of
on-line lottery contracts serviced worldwide by such competitors) were as follows: Scientific Games
Corporation (including the business formerly known as Automated Wagering International, Inc., and IGT
Online Entertainment Systems, Inc.) (42); EssNet AB (22); and Intralot S.A. (26). In January 2006,
Scientific Games Corporation announced that it had signed an agreement to acquire substantially all of the
on-line lottery assets of EssNet AB, including substantially all of EssNet AB’s existing on-line lottery
contracts.
Personnel
As of April 1, 2006, GTECH had approximately 5,300 full-time employees worldwide. The vast
majority of its domestic employees is not represented by any labor union. GTECH believes that its
relationship with its employees is satisfactory.
Properties
GTECH’s world headquarters and research and development and main production facility are located
in two buildings that total approximately 260,000 square feet on approximately 26 acres in West
Greenwich, Rhode Island, which it leases from West Greenwich Technology Associates, L.P. Prior to
February 1, 2005 GTECH had a 50% limited partnership interest in this partnership. On February 1, 2005,
GTECH acquired the remaining 50% interest in, and presently owns 100% of, West Greenwich Technology
Associates, L.P. GTECH also owns approximately 24 acres adjoining its headquarters in West Greenwich,
Rhode Island. In May 2003, GTECH entered into a Master Contract with the Rhode Island Lottery that,
among other matters, relates to the development of a new world headquarters facility containing at least
210,000 square feet in Providence, Rhode Island by December 31, 2006. See Note 16 to Notes to
Consolidated Financial Statements of GTECH included in this Offering Circular for further information
190
respecting the planned relocation of GTECH’s World Headquarters to Providence, Rhode Island, and
certain related matters.
GTECH also owns an approximately 140,000 square foot manufacturing and central storage facility in
Coventry, Rhode Island.
Except in New York State, where GTECH owns its back-up data center facility, GTECH leases, or is
supplied by the relevant state authorities with, its data center facilities in the various jurisdictions. GTECH
also leases office, depot maintenance and warehouse space in a number of other locations.
In addition, GTECH’s subsidiary, Spielo Manufacturing, Inc., owns an approximately 113,000 square
foot office building in Moncton, Canada, and leases an approximately 31,000 square foot manufacturing
and warehouse facility in Saint-Anne-des-Monts, Canada. GTECH’s facilities are in good condition and
are adequate for its present needs.
Legal Proceedings
Brazilian Legal Proceedings
The CEF Contract Proceedings
Background. In January 1997, Caixa Economica Federal (‘‘CEF’’), the Brazilian bank and operator
of Brazil’s National Lottery, and Racimec Informática Brasileira S.A. (‘‘Racimec’’), the predecessor of
GTECH’s subsidiary GTECH Brasil Ltda. (‘‘GTECH Brazil’’), entered into a four-year contract pursuant to
which GTECH Brazil agreed to provide on-line lottery services and technology to CEF (the ‘‘1997
Contract’’). In May 2000, CEF and GTECH Brazil terminated the 1997 Contract and entered into a new
agreement (the ‘‘2000 Contract’’) obliging GTECH Brazil to provide lottery goods and services and
additional financial transaction services to CEF for a contract term that, as subsequently extended, was
scheduled to expire in April 2003. In April 2003, GTECH Brazil entered into an agreement with CEF (the
‘‘2003 Contract Extension’’) pursuant to which: (a) the term of the 2000 Contract was extended into
May 2005, and (b) fees payable to GTECH Brazil under the 2000 Contract were reduced by 15%.
In May 2005, CEF completed a procurement process for products and services to replace those that
GTECH provided under the 2000 Contract. Based upon the commodity auction nature of the procurement
process and the revenue restrictions that were then imposed on GTECH by the courts at the time, GTECH
elected not to participate in the bid process. CEF also announced at such time that it was developing its
central system in-house.
In May 2005, CEF and GTECH Brazil entered into a new agreement (the ‘‘2005 Contract’’) to provide
the same lottery and financial transaction goods and services as were provided under the 2000 Contract.
The 2005 Contract includes a discount of approximately 12% from the then-current pricing under the 2000
Contract and provides for a contract term through May 14, 2006, unless CEF elects to extend the term
beyond such date. In addition, the 2005 Contract provides for GTECH Brazil to be paid in part based upon
the number of terminals installed and connected to the GTECH Brazil central system. As and when new
terminals are installed and connected to the CEF central system, terminals will be de-installed from the
GTECH Brazil central system and, as this occurs, revenues otherwise payable to GTECH Brazil under the
2005 Contract will be correspondingly reduced. The de-installation of GTECH Brazil terminals from
the GTECH central system will materially reduce GTECH’s revenues to be received under the 2005
Contract and any short-term extensions thereof. We may be required to record a charge of $48.4 million to
our consolidated income statement for accumulated foreign currency translation losses related to our
operations in Brazil upon the expiration of the 2005 Contract.
Fiscal 2006 revenues from the 2000 Contract through May 14, 2005, and from the 2005 Contract
thereafter, accounted for approximately 11.1% of GTECH’s total revenues for fiscal 2006, making CEF its
largest customer in fiscal 2006 based on revenues.
191
Criminal Allegations Against Certain Employees and Related SEC Investigation. In late March 2004
federal attorneys with Brazil’s Public Ministry (the ‘‘Public Ministry Attorneys’’) recommended that criminal
charges be brought against nine individuals, including four senior officers of CEF, Antonio Carlos Rocha,
the former Senior Vice President of Holdings and President of GTECH Brazil; and Marcelo Rovai,
GTECH Brazil’s marketing director.
The Public Ministry Attorneys had recommended that Messrs. Rocha and Rovai be charged with
offering an improper inducement in connection with the negotiation of the 2003 Contract Extension, and
co-authoring, or aiding and abetting, certain allegedly fraudulent or inappropriate management practices
of the CEF management who agreed to enter into the 2003 Contract Extension. No other current or
former employee of GTECH or GTECH Brazil has been implicated by the Public Ministry Attorneys.
Neither GTECH nor GTECH Brazil is the subject of this criminal investigation, and under Brazilian law
(which provides that criminal charges may not be brought against corporations or other entities), neither
GTECH nor GTECH Brazil can be subject to criminal charges in connection with this matter.
As previously reported, in June 2004, the judge reviewing these charges prior to their being filed
refused to initiate the criminal charges against the nine individuals, including against Messrs. Rocha and
Rovai, but instead granted a request by the Brazilian Federal Police to continue the investigation which
had been suspended upon the recommendation of the Public Ministry Attorneys that criminal charges be
brought.
The Brazilian Federal Police subsequently ended their investigation and presented a report of their
findings to the court. This report did not recommend that indictments be issued against Messrs. Rocha or
Rovai, or against any current or former employee of GTECH.
The Public Ministry Attorneys have since requested that the Brazilian Federal Police reopen their
investigation. GTECH understands that investigations by the Brazilian Federal Police are ongoing,
including an investigation respecting the award of, and performance under, the 1997 Contract and the 2000
Contract.
As previously reported, GTECH is cooperating fully with the investigations by Brazilian authorities
and has encouraged Messrs. Rocha and Rovai to do the same.
In addition, as previously reported, GTECH conducted an internal investigation of the 2003 Contract
Extension under the supervision of the independent directors of GTECH Holdings Corporation. The
investigation did not reveal any reason to believe that any of GTECH’s or GTECH Brazil’s current or
former employees had committed any criminal offenses.
Notwithstanding the favourable resolution of the Brazilian Federal Police’s initial investigation, on
January 31, 2006, a special investigating panel of the Brazilian congress issued a preliminary report and
voted, among other things, to ask the Public Ministry Attorneys to indict CEF President Jorge Mattoso and
more than 30 other people, including one current and three former employees of GTECH Brazil, alleging
that the individuals helped GTECH to illegally obtain the 2003 Contract Extension. The report also
recommends that the 2005 Contract terminate, and not be extended by CEF, upon the expiration of the
term of the 2005 Contract in May 2006. GTECH finds nothing in the congressional report to cause it to
believe that any present or former employee of GTECH or GTECH Brazil committed any criminal offense
in connection with obtaining the 2003 Contract Extension. Nevertheless, there can be no assurance that the
Public Ministry Attorneys will not seek to indict or initiate criminal charges against one or more current or
former GTECH Brazil employees in the wake of the issuance of the congressional report, or that the final
congressional report will not request additional action against GTECH.
As previously reported, the SEC began an informal inquiry in February 2004, which informal inquiry
became a formal investigation in July 2004, into the Brazilian criminal allegations against Messrs. Rocha
and Rovai, and GTECH’s involvement in the facts surrounding the 2003 Contract Extension, to ascertain
whether there has been any violation of United States law in connection with these matters. In addition, in
May 2005, representatives of the United States Department of Justice asked to participate in a meeting
192
with GTECH and the SEC. GTECH has cooperated fully with the SEC and the United States Department
of Justice with regard to these matters, including by responding to their requests for information and
documentation.
To date GTECH has found no evidence that it, or any of its current or former employees, has violated
any United States law, or is otherwise guilty of any wrongdoing in connection with these matters.
In light of the fact that GTECH’s reputation for integrity is an important factor in its business dealings
with lottery and other governmental agencies, an allegation or finding of improper conduct by GTECH or
any of its current or former employees that is attributable to GTECH could have a material adverse effect
on GTECH’s results of operations, business or prospects, including its ability to retain existing contracts or
to obtain new or renewal contracts within Brazil and elsewhere. See ‘‘Risk Factors—Risk Factors Relating
to GTECH—Government regulations and other actions affecting the on-line lottery industry could have a
negative effect on GTECH’s business, results of operations or prospects’’.
Civil Action By The Public Ministry Attorneys. As previously reported, in April 2004 the Public
Ministry Attorneys initiated a civil action in the Federal Court of Brasilia against GTECH Brazil; 17
former officers and employees of CEF; the former president of Racimec; Antonio Carlos Rocha; and
Marcos Andrade, another former officer of GTECH Brazil. The focus of this civil action is the contractual
relationship between CEF, GTECH Brazil and Racimec during the period 1994 to 2002. This civil action
alleges that the defendants acted illegally in entering into, amending and performing, the 1997 Contract,
and the 2000 Contract.
As previously reported, this lawsuit also seeks to impose damages equal to the sum of all amounts
paid to GTECH under the 1997 Contract and the 2000 Contract, and certain other permitted amounts,
minus GTECH’s proven investment costs. The applicable statute also permits the assessment of interest
and, in the discretion of the court, penalties of up to three times the amount of the damages imposed.
GTECH estimates that through the date of the lawsuit it received under the 1997 Contract and the 2000
Contract a total of approximately 1.5 billion Brazilian reals (or approximately 702 million United States
dollars at currency-exchange rates in effect as of February 25, 2006). In addition, although it is unclear how
investment costs would be determined for purposes of this lawsuit, GTECH estimates that its investment
costs through the date of the lawsuit were approximately between 1.2 billion and 1.4 billion Brazilian reals
(or approximately between 562 million and 656 million United States dollars) at currency exchange rates in
effect as of February 25, 2006 in aggregate; however, these investment costs could be disputed by CEF, and
are ultimately subject to approval by the court.
As previously reported, GTECH believes it has good and adequate defenses to the claims made in this
lawsuit. GTECH intends to defend itself vigorously in these proceedings, which, GTECH has been advised
by its Brazilian counsel, are likely to take several years, and could take longer than 15 years in certain
circumstances, to litigate through the appellate process to final judgment. It is GTECH’s position that it
was appropriately awarded the 1997 Contract by CEF after a competitive procurement, and that at all
times since 1997, GTECH has been appropriately compensated for services performed under valid
contracts with the CEF.
While GTECH cannot rule out the possibility that it will ultimately be held liable in this matter, or
estimate the amount of such liability in such event, GTECH believes that the outcome of this lawsuit is not
likely to have a material adverse affect on its results of operations or business.
As previously reported, in June 2004, the Federal Court of Brasilia granted a procedural injunction in
connection with this civil matter which ordered that 30% of payments made subsequent to the date of the
injunction to GTECH Brazil by CEF under the 2000 Contract be withheld and deposited into an account
maintained by the Court. This injunction also put in place restrictions that effectively prevented the
transfer or sale of GTECH’s Brazilian assets, including the share capital of GTECH Brazil, with certain
limited exceptions. The injunction was granted as part of a confidential ex parte proceeding in which
GTECH was not afforded an opportunity to participate.
193
GTECH filed an appeal respecting the court’s grant of this injunction in July 2004. On March 22,
2005, a panel of judges of the Brazilian Federal Court of Appeals heard GTECH’s appeal of the
procedural injunction granted by the Federal Court of Brasilia and issued an order: (a) discontinuing the
withholding of payments due to GTECH Brazil from CEF that had been mandated by the procedural
injunction; (b) removing the procedural injunction’s restrictions on the transfer or sale of GTECH’s
Brazilian assets; and (c) requiring the return to GTECH Brazil of amounts in excess of 40 million Brazilian
reals held in escrow pursuant to the procedural injunction, thereby permitting the return to GTECH of
approximately 11 million United States dollars of the 26 million United States dollars held in escrow as of
the end of fiscal 2005. The appeals court also ordered that 40 million Brazilian reals continue to be held in
escrow, and that the procedural injunction’s requirements that defendants report assets to the court, and
that the Brazilian Central Bank report any transaction associated with these assets, be maintained.
GTECH has appealed the Court of Appeals decision with respect to the continued withholding of
40 million Brazilian reals in a court account and the deadline for the Public Ministry Attorneys to appeal
this decision of the Court of Appeals has expired. Amounts, exclusive of interest, held in escrow as of
February 25, 2006 were valued at approximately U.S.$18.2 million at currency exchange rates in effect as of
such date.
Popular Claim. As previously reported, in February 2004, Vincius Bijos, a Brazilian, commenced a
public class action lawsuit in Brazil’s Brasilia District Court of the Federal District against the Brazilian
Federal government; CEF; several former and current officers of CEF; the former president of Racimec;
and GTECH Brazil, seeking, among the relief requested of the Court, a preliminary injunction prohibiting
CEF from making further payments to GTECH Brazil under the now superseded 2000 Contract, and an
order that would terminate such contract and require the defendants, jointly and severally, to refund
amounts received by GTECH Brazil under the 1997 Contract and the 2000 Contract, together with
interest, appropriate monetary adjustments, court costs and expenses. This public class action lawsuit bases
its claims upon numerous alleged defects and irregularities, which the suit asserts violate Brazilian law, in
the 1997 Contract and the 2000 Contract, and the manner in which the procurement processes that gave
rise to the awards of these contracts were organised and administered. GTECH intends to mount a
vigorous challenge to the far-reaching claims that make up this lawsuit. GTECH notes that the Public
Ministry Attorneys filed an opinion with the federal court disagreeing with the request that an injunction
enjoining payments from CEF to GTECH Brazil be entered and requesting that this suit be consolidated
with the Public Ministry Attorneys’ civil action described above.
GTECH believes that it has good and adequate defenses in this matter and intends to defend itself
vigorously in these proceedings. GTECH further believes that the claims and determinations of the public
class action lawsuit will be merged into the civil action instituted by the Public Ministry Attorneys
described above, and are accordingly unlikely to represent an independent source of liability for GTECH.
While GTECH cannot rule out the possibility that it will ultimately be held liable in this matter, or
estimate the amount of such liability in such event, GTECH believes that the outcome of this lawsuit is not
likely to have a material adverse effect on its results of operations or business.
TCU AUDIT. As previously reported, in June 2003, the TCU, the court charged with auditing
agencies of the Brazilian federal government and its subdivisions, summoned GTECH, together with
several current and former employees of the CEF, to appear before TCU’s Brasilia court to show cause
why they should not be required to jointly pay a base amount determined on a preliminary basis by the
TCU to be due of 91,974,625 Brazilian reals, duly indexed for inflation and interest as of May 26, 2000
(Decision No. 692/2003). GTECH estimates that this claim, in aggregate, is for the local currency
equivalent of approximately 43 million United States dollars at currency exchange rates in effect as of
February 25, 2006. The allegations underlying this summons are set forth in a report (the ‘‘2003 Audit
Report’’) issued by the TCU in May 2003 respecting an audit conducted by the TCU of the 1997 Contract.
The central allegation of the 2003 Audit Report is that under the 1997 Contract GTECH was
accorded certain payment increases respecting lottery services, and it contracted to supply to CEF certain
194
lottery-related services, that were not contemplated by the procurement process respecting the 1997
Contract and that are not otherwise permitted under applicable Brazilian law. The 2003 Audit Report
alleges that as a result of this, CEF overpaid GTECH under the 1997 Contract for the period commencing
in January 1997 through May 26, 2000, and that GTECH is liable with respect to such alleged
overpayments as specified above.
In November 2003, GTECH presented its defense to the claims and preliminary determination of the
TCU that CEF had overpaid it. In light of its defense, in September 2004, the TCU reduced its
determination of the amount alleged to have been overpaid to GTECH by CEF under the 1997 Contract
from 91,974,625 Brazilian reals to 30,317,721 Brazilian reals, or approximately 14 million United States
dollars at currency exchange rates in effect as of February 25, 2006. This determination by the TCU
remains subject to approval by TCU’s judges.
In June 2005, the TCU issued a second preliminary report (the ‘‘2005 Audit Report’’; collectively with
the 2003 Audit Report, the ‘‘TCU Audit Reports’’) respecting GTECH’s contracts with CEF. While GTECH
has not been formally served with a copy of the 2005 Audit Report, GTECH understands that its central
allegations are that the 1997 Contract was improperly transferred from Racimec to GTECH Brazil;
GTECH was accorded certain payment increases respecting financial services transactions that were not
contemplated by the procurement process respecting the 1997 Contract or otherwise permitted under
applicable Brazilian law; and the 2003 Contract Extension was entered into a manner inconsistent with
Brazilian law and the procurement process respecting the 1997 Contract. The 2005 Audit Report alleges
that as a result of these considerations, CEF overpaid GTECH under the 1997 Contract and the 2000
Contract. The 2005 Audit Report seeks payment from GTECH of a base amount determined on a
preliminary basis by TCU to be approximately 300 million Brazilian reals. GTECH estimates this claim in
aggregate, is for the local currency equivalent of approximately 140 million United States dollars at
currency exchange rates in effect as of February 25, 2006. Amounts sought by the TCU under the 2005
Audit Report are independent of, and in addition to, amounts sought under the 2003 Audit Report.
GTECH plans to vigorously defend itself against the allegations made by TCU in the TCU Audit
Reports and the proceedings initiated by the TCU with respect thereto. GTECH believes that it has good
defenses to the claims and determinations of the TCU. GTECH further believes that the claims and
determinations of the TCU Audit Reports will, in essence, be merged into the civil action instituted by the
Public Ministry Attorneys described above, and are accordingly unlikely to represent an independent
source of liability for GTECH. While GTECH is unable to rule out the possibility that it will ultimately be
held liable in this matter, it believes that the outcome of this matter is not likely to have a material adverse
effect on its results of operations or business.
Serlopar Suit
As previously reported, in April 2002 Serlopar, the lottery authority for the Brazilian state of Parana,
sued GTECH’s subsidiaries Dreamport Brasil Ltda. and GTECH Brazil in the 2nd Public Finance Court of
the City of Curitiba, State of Parana, under an agreement dated July 31, 1997, as amended (the ‘‘VLT
Agreement’’). Pursuant to the VLT Agreement, GTECH agreed to install and operate video lottery
terminals (‘‘VLTs’’) in Parana. The Serlopar lawsuit alleges that GTECH installed only 450 of the 1,000
VLTs that it was allegedly obliged to install, and that GTECH was overpaid, and failed to reimburse
Serlopar certain amounts alleged to be due to Serlopar, under the VLT Agreement. The Serlopar lawsuit
seeks payment from GTECH in an amount (after adjustment for inflation and interest through
February 25, 2006) equal to 124,252,740 Brazilian reals, or approximately 58 million United States dollars
(at currency exchange rates in effect on February 25, 2006), together with unspecified amounts alleged to
be due from the defendants with respect to general losses and damages (including loss of revenues), court
costs and legal fees. GTECH believes it has good defenses to the claims made by Serlopar in this lawsuit,
and intends to continue to defend itself vigorously in these proceedings. GTECH believes that the outcome
of this suit will not have a material adverse impact on its results of operations or business.
195
On January 10, 2006, GTECH and Lottomatica announced that they had entered into the Merger
Agreement. Two shareholder class action lawsuits were subsequently filed against GTECH and its directors
respecting this proposed merger.
behalf of all others similar situated, v. GTECH Holdings Corporation, W. Bruce Turner, Robert M. Dewey,
Paget L. Alves, Christine M. Cournoyer, James F. McCann, The Rt. Hon. Sir Jeremy Hanley KCMG, Philip R.
County. This lawsuit generally alleges that the consideration to be received by GTECH shareholders in
the Merger will be presented for approval of shareholders, and Lottomatica has agreed to cause to be paid
plaintiffs’ claim for attorneys’ fees and expenses.
196
Argentina Money Transfer Matter
In February 2005, GTECH Foreign Holdings Corporation, Argentina Branch (‘‘GFHC’’) and
GTECH’s Argentina legal counsel, Dr. Jorge Perez of Perez, del Barba and Rosenblum, received
notification from the Central Bank of Argentina that they were being indicted for alleged violations of
Argentina’s currency exchange laws. The Argentina laws in question prohibit the transfer of foreign
currency from Argentina, subject to certain exceptions not here relevant. At issue is a February 2002
agreement (the ‘‘BofA Agreement’’) between GFHC and Bank of America, N.A., Buenos Aires Branch
(‘‘BofA’’) pursuant to which BofA assigned to GFHC a certificate of deposit in the amount of 571,429
United States dollars (the ‘‘CD’’), issued by Bank of America, Charlotte, North Carolina Branch
(‘‘BofA-North Carolina’’), in consideration for the payment of 1.4 million Argentina pesos. Upon maturity of
the CD, the agreement provided for BofA-North Carolina to pay 571,429 United States dollars to a GFHC
branch bank account in the United States. GTECH understands that the central claim of the Argentina
Central Bank’s indictment will be that the BofA Agreement was a transaction in which foreign currency
was transferred, in essence, from Argentina to the United States in violation of applicable Argentina law.
If GFHC is found guilty of violating applicable Argentina currency exchange laws, as charged in the
indictment, GTECH would be liable to pay a fine of up to approximately 5.7 million United States dollars
(i.e., ten times the amount of United States dollars allegedly transferred from Argentina) and could be
prohibited for up to ten years from importing goods into, or exporting goods from, Argentina.
GTECH notes that BofA, which solicited GTECH to enter into the BofA Agreement, and
approximately 20 other customers of BofA including several subsidiaries of large multi-national
corporations, have been indicted in connection with transactions similar to the transaction outlined in the
BofA Agreement. GTECH understands that the Central Bank of Argentina’s indictments against BofA
were rejected by the courts. BofA explicitly represented to GTECH in the BofA Agreement that the
transaction described therein did not violate any Argentina law or regulation, and GTECH believes that it
took appropriate measures independent of this representation (including obtaining the opinion of local
counsel) in advance of entering into the BofA Agreement to ascertain that this transaction was legal under
applicable Argentina law. GTECH believes that it has good defenses to the claims made in the indictment,
and GTECH intends to vigorously defend itself in these proceedings. GTECH does not believe that the
outcome of this suit will have a material impact on its results of operations or business.
Trinidad and Tobago
In 1993, a subsidiary of GTECH and the National Lottery Control Board (‘‘NLCB’’) of Trinidad and
Tobago (‘‘Trinidad’’) entered into an agreement (the ‘‘Trinidad Agreement’’) for a five year term pursuant to
which GTECH would provide on-line lottery services and technology to the NLCB. GTECH assigned that
contract to a subsidiary (the ‘‘Subsidiary’’) doing business in Trinidad. In July 1999, the Trinidad
Agreement was amended to extend the term for an additional seven years, and to increase the
compensation that the Subsidiary would receive if lottery proceeds in Trinidad exceeded a stated threshold.
In connection with negotiating this extension, GTECH proposed to provide up to U.S.$2.8 million in
funding for community programs in Trinidad, and the extension amendment GTECH entered into requires
the Subsidiary to undertake such community programs in Trinidad as are agreed with the NLCB.
From 1999 until 2001, the Subsidiary paid U.S.$1.9 million to a private entity in connection with a
proposal, approved by the NLCB, to provide community services in Trinidad. In March 2006,
representatives of the Attorney General of Trinidad contacted GTECH regarding an allegation that a
portion of that amount was paid by the private entity to a person who was a financial supporter of a
Trinidad political party, and that the private entity had provided no services in return for the payments.
GTECH has commenced an investigation into the circumstances surrounding the payments. The
investigation is ongoing.
GTECH has informed the SEC about the allegations and investigation. The SEC or other law
enforcement agencies in the United States or Trinidad may commence investigations and actions as a
197
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of and for the three month period ended March 31, 2006
8.
Current Financial Assets (Continued)
when a certain agreed upon event takes place. In the case in point, the event that triggers the existence of
the coverage is the conclusion of the acquisition of GTECH on the part of Lottomatica.
The combination of the two strategies guaranteed a flexible coverage in relation to the payment of
premiums and fees. The fact that a part of the coverage was done through an alternative instrument rather
than Call USD options allowed certain savings.
Lottomatica fixed a portion of the acquisition cost of $2,484 billion up to June 2006, at an average
exchange rate of 1.2116 U.S. dollar for 1 Euro, for a total cost of A/000 48,356. Since a part of the coverage
is contingent to the contractual event, in the event of the failure to close the GTECH transaction, the total
cost of the coverage would be reduced to approximately A/000 37,679. The portion of the premiums not yet
paid at March 31, 2006, amounting to A/000 36,956 has been included in the liabilities under the caption
‘‘Current financial liabilities’’.
The mark to market valuation at March 31, 2006 of the entire amount of the options at March 31,
2006, amounts to A/000 23,077, resulting in higher financial costs the income statement of the period of
A/000 14,602, principally due to the time value component of these options.
The residual component of the current financial assets relates to the loan receivable from the
company Bingo Plus (A/000 1,644). The balance at December 31, 2005 included the investment held by
Lottomatica in Italian Government Bonds (Ordinary Treasury Bonds) that were disposed of on January 16,
2006.
9.
Other Current Assets
Other current assets amount to A/000 260,927 at March 31, 2006 (A/000 189,808 at December 31, 2005)
and are mainly related to the credits toward the bet collectors in the ambit of the various games and
services (A/000 200,581 at March 31, 2006 and A/000 183,012 at December 31, 2005) net of the related
allowance for doubtful accounts (A/000 3,382 at March 31, 2006 and A/000 3,395 at December 31, 2005)
In particular, the receivables from the receivers principally concern:
—
The Consorzio Lotterie Nazionali (A/000 184,228 at March 31, 2006 compared to A/000 166,712 at
December 31, 2005), related to receivables from the receivers for instant and deferred lottery
tickets delivered as of March 31, 2006. On the basis of contractual agreements, the repayment on
the part of the receivers (net winnings paid and fees due) is usually done 15 days from delivery;
—
Lottomatica Italia Servizi (A/000 13,861 net of the Allowance for doubtful accounts of A/000 449 at
March 31, 2006, compared to A/000 15,383 net of the Allowance for doubtful accounts of A/000
386 at December 31, 2005) relates to credits to receivers for the sums still to be received in
respect to the sales from the last few days of the month of March for re-charges of the operator
Telecom Italia Mobile;
—
Lottomatica (A/000 2,478 at March 31, 2006 compared to A/000 915 at December 31, 2005) for
amounts to be reversed by the bet collectors for the collection of the Tris and sports gaming bets.
The balance also includes the charges for the announced acquisition of the GTECH group (A/000
2,186), relating to the amounts that will constitute an incremental value of the asset/liability as a result of
B-22
MARKET OVERVIEW
Overview
Lottomatica bases statements relating to the gaming and services industries contained in this Offering
Circular on information compiled by Lottomatica, or derived from independent public sources which
Lottomatica believes to be reliable. No assurance can be given, however, regarding the accuracy of such
statements. In general, there is less publicly-available information concerning the international gaming
industry than the gaming industry in the United States, and less publicly-available information concerning
the services industries in which Lottomatica operates than the gaming industry.
Lottomatica currently operates in the Republic of Italy, and GTECH currently does business in
51 countries worldwide and 26 states of the United States.
International Gaming Market
Generally
In most countries, the gaming market is generally heavily regulated. Each country governs the gaming
sector, from a regulatory point of view as well as an administrative point of view, with its own solutions.
Lotteries and other gaming activities are typically regulated by a governing body. The organisational model
varies from country to country, although, more frequently, the operation of games is conducted by one or
more dedicated, public or private entities. In certain countries, such as the United Kingdom, Spain and the
Republic of Italy, the operation of games is conducted by several operators. In the United States, there is a
lottery authority, or a commission for gaming activities in each state.
The gaming market is vast and variable, able to satisfy the needs of customers who, though living in
different countries and continents, have a shared interest in gaming. The different games offered
throughout the world can be traced back to historical roots (for example, Lotto in the Republic of Italy),
depend on player preferences (which are influenced by tradition and game structure), and also are linked
to the gaming providers’ development ability (e.g., innovation of the game, distribution network, and
technological innovation).
Lottomatica considers that the world gaming market, which in 2003 reached approximately
U.S.$433 billion based on effective gambling turnover, is not still overstocked and growth of the market
should be expected. Effective gambling turnover is the amount wagered in all games except casino games
and Gaming Machines for which gross gambling yield is used. Gross gambling yield is the total amount
wagered less amounts paid out to players as winnings. Management believes that the world gaming market
is still not saturated and that many growth opportunities still exist. In the 1999-2003 period, the weightedaverage growth rate was approximately 2.5%. Global Betting and Gaming Consultants forecasted annual
growth of approximately 2.3% and 2.4% during 2005 and 2006, respectively. (Source: Global Betting and
Gaming Consultants, 2004.)
199
433.5
450
384.5
394.5
402.2
1999
2000
2001
410.6
300
150
0
North America
Europe
Asia
2002
Center-South America
2003
Africa Oceania
29APR200614565266
(Source: Global Betting and Gaming Consultants, 2004)
On a worldwide basis, the supply of gaming products is extremely varied and can be broken down by
game lines, such as:
Gaming
• Casino (poker, black jack, roulette, baccarat);
• Gaming Machines (amusement with prize machines, video lottery terminals); and
• Other games (bingo, keno).
Lotteries
• Lotteries (Lotto, instant and traditional lotteries).
Betting
• Pari-mutuel sports and horse race betting;
• Fixed-odds horse race betting;
• Greyhound/Jai Alai (fixed-odds and pari-mutuel); and
• Sports pools (fixed-odds and pari-mutuel).
The development of these game lines among different countries is highly diversified. This is
attributable, in particular, to macroeconomic factors, but also to player preferences and local legislation. In
North America, for example, the casino segment is far more developed than in the other regions, while
betting is particularly developed in Asia.
Distribution is still limited for the gaming-machine segment (amusement with prize machines and
video lottery terminals), portions of which have not yet been legalised in some countries, and have just
been legalised, since mid-2004, in the Republic of Italy.
200
21. Revenues
Revenues amount to A/000 189,245 for the quarter ended March 31, 2006 (A/000 185,450 for the
quarter ended March 31, 2005) and consist of:
Three months
ended
March 31, 2006
Amount
%
Three months
ended
March 31, 2005
Amount
%
Games . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170,038
89.9% 170,374
91.9%
-)
-)
-)
-)
-)
-)
-)
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.
132,421
1,107
1,609
2,377
788
30,976
760
69.97% 155,202
0.58%
802
0.85% 2,049
1.26% 1,371
0.42%
534
16.37% 9,966
0.40%
450
83.69%
0.43%
1.10%
0.74%
0.29%
5.37%
0.24%
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,207
10.1% 15,076
8.1%
-)
-)
-)
-)
-)
-)
-)
-)
-)
-)
Lotto Games . . .
Tris . . . . . . . . . .
Games of Chance
Video Lotteries . .
Betting Services .
National Lotteries
PCC GS S.p.A. . .
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Telephone recharges LIS network . . .
Telephone recharges Totobit network
POWER POS activation revenue . . .
Sports box office . . . . . . . . . . . . . . .
Utilities bill payments fee . . . . . . . .
Vehicle license fee . . . . . . . . . . . . . .
Television license fee . . . . . . . . . . . .
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Other services . . . . . . . . . . . . . . . . .
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.
.
.
.
.
.
.
.
7,427
1,787
2,007
922
1,004
3,169
471
0
152
2,268
189,245
3.92%
0.94%
1.06%
0.49%
0.53%
1.67%
0.25%
0.00%
0.08%
1.20%
6,475
1,760
479
1,024
3.49%
0.95%
0.26%
0.55%
3,326
606
145
152
1,109
1.79%
0.33%
0.08%
0.08%
0.60%
100% 185,450
100%
For the preparation of the income statement, on the basis of IAS 18 (revenue recognition), the group
reported the revenues from telephone recharges net of the costs both for the controlled company LIS and
for the Totobit group. This decision has been motivated by the fact that in the transaction the company
matures as revenue only the margin between the sale price and the nominal cost of the card.
The same treatment has been followed for the revenues of RTI Videolottery that, under the
concession and the subsequent ministerial regulations, earns the collection revenues net of the tax revenue
(Consolidated Tax Withdrawal) and of the winnings paid, but, before the compensations to be paid to
service providers and storekeepers (these are included in the operating costs).
22. Other Revenues and Income
Other Revenues and Income amount to A/000 1,061 for the quarter ended March 31, 2006, compared
to A/000 3,685 for the quarter ended March 31, 2005.
B-29
27. Other Operating Costs
Other operating costs amount to A/000 4,125 for the quarter ended March 31, 2006 (A/000 511 for the
quarter ended March 31, 2005) and is composed of the following:
—Miscellaneous Operating Expenses: A/000 1,565. The most significant shares relate to:
—The costs related to the accrual of prior period’s costs (A/000 612)
—Fees paid for the merger for A/000 221
—Non-deductible VAT for A/000 265
—Indirect taxes of the period for A/000 43
—Provision for Risks: A/000 2,505. These almost entirely refer to provisions made by Lottomatica as
the concessionary of RTI for the collection of legal games.
—Other Provisions: A/000 55. These essentially relate to outlays made by Lottomatica for prize
competitions.
28. Financial Expenses, net
Net financial expenses amount to A/000 17,800 for the quarter ended March 31, 2006 (A/000 2,887 for
the quarter ended March 31, 2005) and is composed of the following:
Three months
ended
March 31, 2006
Three months
ended
March 31, 2005
Bank interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,608
106
1,631
77
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,714
1,708
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financial expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,124)
297
(14,687)
(4,556)
(1)
(38)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(19,514)
(4,595)
(17,800)
(2,887)
Interest income principally refer for the most part to asset interest on bank deposits.
Interest expense is mainly related for A/000 4,393 to the liability interest due on the bond loan, and for
A/000 609 to the valuation of the mark-to-market of the coverage contracts of the Consorzio Lotterie
Nazionali.
Other financial expenses mainly include A/000 14,602 related to the mark-to-market valuation of the
option contracts underwritten in connection with the possible GTECH acquisition.
B-32
29. Income Taxes
Income taxes for the quarter ended March 31, 2006 amount to A/000 34,582 (A/000 41,749 for the
quarter ended March 31, 2005) of which A/000 34,574 for current taxes, (for IRES A/000 27,860 and A/000
6,714 for IRAP), A/000 8 for deferred income taxes. The detail is the following:
Three months
ended
March 31, 2006
Three months
ended
March 31, 2005
27,860
6,714
8
29,286
4,580
7,883
34,582
41,749
Corporate income tax (IRES) . . . . . . . . . . . . . . . . . . . . . . . . .
Local income tax (IRAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred taxes included in the balance sheet at March 31, 2006 and at December 31, 2005 is as
follows:
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31,
2006
December 31,
2005
60,043
(47,116)
55,009
(44,233)
12,927
10,776
Deferred tax assets amount to A/000 60,043 at March 31, 2006 (A/000 55,009 at December 31, 2005).
The most significant amounts relate to the recognition in the prior fiscal year of the deferred tax assets
of Lottomatica S.p.A., related to:
—The tax amortization of the goodwill deriving from the merger of Lottomatica S.p.A. with Tyche in
2001with a different tax and reporting basis;
—The write-down of shares held in Lottomatica Sistemi S.p.A, and Twin, now liquidated;
—The tax amortization of the goodwill of Sogei, Tyche, EIS and Twin.
The amount relating to Lottomatica Sistemi derives from the recognition of deferred taxes on the
write-down of the goodwill recorded at December 31, 2003.
Deferred tax liabilities amount to A/000 47,116 at March 31, 2006 (A/000 44,233 at December 31, 2005)
and they principally include the deferred taxes on goodwill (A/000 36,881).
30. Earnings per share
The basic earning per share is calculated by dividing the net earning of the period attributable to the
Group by the weighted average number of the ordinary shares in outstanding during the period.
The diluted earning per share is calculated by dividing the net earning of the period attributable to the
ordinary shareholders of the ordinary shares in circulation during the period, adjusted for the dilution
effects of the options.
B-33
30. Earnings per share (Continued)
In the table the revenue and the information of the share are reported for the purpose of calculating
the earning per-share, basic and diluted, for the quarters ended March 31, 2006 and 2005.
Three months
ended
March 31, 2006
Three months
ended
March 31, 2005
Earning per basic share
Net income for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of circulating ordinary shares (000) . . . . . . . .
41,426
89,960
61,659
88,974
Earning per basic share — basic (E/1000 shares) . . . . . . . . . . . . . . . . . .
0.46
0.69
Earning per diluted share
Net income for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of circulating ordinary shares (000) . . . . . . . .
Number of options (000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,426
89,960
1,555
61,659
88,974
4,103
Earning per diluted share (E/1000 shares) . . . . . . . . . . . . . . . . . . . . . . .
0.45
0.66
31. Financial Lease and Rental Contracts
The Group has stipulated contracts for financial leases and rental for various systems and machinery,
and also for other assets. The leases contracts include renewal clauses, but not options to buy or term
revaluation clauses. The renewal may be done according to the wishes of the lessor.
32. Financial Risk Management: Objectives and Criteria
The principal financial instruments of the group (apart from derivatives) are bond issues in the
amount of A/000 360,000, bank deposits (time and sight) and government bonds (Treasury Orders). In
order to cover exposure deriving from the Consorzio Lotterie Nazionali for the purchase of semi-finished
goods for the production of Scratch and Win tickets derivative contracts have been stipulated in exchange
for an amount equal to 50% of the estimate provisions until the term of the concession through derivative
instruments. For further details on the characteristics of these products see the section Derivatives of
Change in the present document. The coverage currently in effect was proposed by Financial Management
and approved by the Chief Executive Officer working together with the parent company. The company is
currently preparing a policy for the negotiation of derivative instruments to cover exchange and interest
rate risks that specifies in a detailed manner the roles, responsibilities, areas of autonomy and information
flow.
Liquidity Policy
After the approval on the part of the Executive Committee of the Parent Company, in the course of
2004, the Board of Directors of Lottomatica approved a Liquidity Policy: the objective of this policy is to
maintain invested capital; the characteristics of the portfolio of investments with the necessary cash-flow
and the financial maneuvers of the individual companies; and obtaining an adequate remuneration.
B-34
U.S. Gaming Market
In the United States, lottery revenues are frequently designated for particular purposes, such as
education, economic development, conservation, transportation and aid to the elderly. Many states have
become increasingly dependent on their lotteries as revenues from lottery ticket sales are often a
significant source of funding for these programs.
Typically, approximately 57.5% of the gross revenues of an on-line lottery in the United States is
returned to the public in the form of prizes. Approximately 31.2% is used by the state to support specific
public programs or as a contribution to the state’s general funds. The remaining 11.3% is generally used to
fund the operations of the lottery, including the cost of advertising, sales commissions to point-of-purchase
retailers and service fees to vendors such as GTECH.
According to La Fleur’s 2003 and 2005 World Lottery Almanacs, from 1972 through 2004, total
annual lottery ticket sales in the United States grew from approximately U.S.$295.0 million to
approximately U.S.$44.9 billion, although, in recent years, as the United States lottery industry has
matured, the rate of lottery sales growth has moderated and certain of GTECH’s customers have from
time-to-time experienced a downward trend in sales. See ‘‘Risk Factors—Risk Factors Relating to
GTECH—Slow growth or declines in sales of on-line lottery goods and services could lead to lower
revenues and cash-flows for GTECH’’, above.
There are currently 43 jurisdictions that authorise the operation of on-line lotteries in the United
States. Implementation of lotteries in other jurisdictions will depend upon successful completion of
legislative, regulatory and administrative processes.
205
REGULATORY FRAMEWORK
The gaming and betting industry, in the Republic of Italy like in most countries, is regulated in all
aspects by government authorities. The Italian gaming and betting regulatory authority is the AAMS. Any
new rule making and/or administrative provisions could have unfavourable effects on Lottomatica,
changing the situation in which it operates. In particular, the institution and operation of new games, the
determination of the compensation pertaining to the concession holders themselves, the identity and the
number of the concession holders, and the pertinent tax regimen are determined by legislative and
administrative provisions.
Legislative Decree No. 496 of April 14, 1948, establishes that ‘‘the organisation and the business of
games of skill and games of chance, for which a compensation of any nature is paid and the participation to
which requires the payment of a money stake, are reserved to the state’’.
This Decree has referred the practice of these activities to the Ministry of Finances (currently Ministry
of Economy and Finances) which can directly carry out the management, or through natural and legal
persons who offer an adequate guarantee of suitability.
Such Decree also establishes that the amount of the commission due to the providers and to the other
management modalities will be set in special agreements to the stipulated in accordance with the policy
regulations provided for in article 5, according to which ‘‘by Decree of the President of the Republic of
Italy, following proposal of the Ministry of Finances together with that of the Interior, the statutory
regulations for the application and execution of the present Decree will be issued’’.
By Decree of the President of the Republic of Italy No. 58 of April 18, 1951, the statutory regulations
for the application and the execution of Legislative Decree No. 496 dated April 14, 1948, were issued.
Article 3, paragraph 77 of Law No. 662 of December 23, 1996 (linked to the Budget Law), reserved
the organisation and the management of the gaming and betting correlated to horse racing to the Ministry
of Finance and the Ministry of Agricultural Policies, which can provide for them either directly or through
public agencies or companies they have selected.
With the implementation of Article 12 of Law No. 383 of October 18, 2001—that had set the
guidelines for regulatory interventions aimed at the achievement of ‘‘the unitary management of state
functions on gaming, personnel training and the transferring of non-tangible goods to the townships’’—
Legislative Decree No. 33 of January 24, 2002, attributed to the AAMS the management of the state
functions concerning the organisation and management of gaming, betting and games of chance.
Subsequently, Decree No. 138 of July 8, 2002, converted into Law No. 178 of August 8, 2002,
attributed to the AAMS the execution of all its functions concerning the organisation and business of
gaming, betting and games of chance.
Lotto
Legal Framework prior to the First Concession Decrees
Law No. 528 of August 2, 1982 (‘‘Law 528/82’’) stipulated that Lotto was reserved to the Government
and awarded its operation to the AAMS.
Law No. 85 of April 19, 1990 (‘‘Law 85/90’’), which modified Law 528/82, provided for the
implementation of a new automated system for Lotto operation. This law also required, in order to
progressively extend Lotto bet collection to resellers of monopoly items, for the AAMS to arrange, within
2, 5, and 7 years from the implementation of the automated system, the determination of 10,000, 12,500,
and 15,000 bet collection points, respectively, and that within 9 years from such implementation, the
relevant concession be issued to every applying reseller.
206
The regulation for the application and enforcement of Law 528/82 and Law 85/90, issued with the
Decree of the President of the Republic of Italy No. 303 of August 7, 1990 provided, inter alia, that:
(a) compensation for bet collection agents be 10% of gross receipts from tickets (later reduced to 8%
by Ministerial Decree No. 474 of December 13, 2002);
(b) concession contracts with bet collection agents be entered into by the office of the compartmental
Government Monopolies inspector having jurisdiction, for a term of no more than 9 years; and
(c) operation of Lotto be managed by the Ministry of Economy and Finances through the AAMS.
A Comitato Interministerie per la Programmazione Economica (Interministerial Committee for
Economic Programs, ‘‘CIPE’’) resolution issued on February 18, 1993 provided for the Ministry of
Economy and Finances to be able to award the concession of the automated Lotto service to an entity
giving a sufficient guarantee regarding its assets and its technical and organisational structure.
The Ministerial Decrees of Concession
Ministerial Decree of March 17, 1993 provided for the transfer in favour of Lottomatica of the
Ministry of Finances’ state powers regarding automated Lotto operation.
This Decree introduced, also, the following provisions:
• the Ministry of Finances, (now the Ministry of Economy and Finances) exercises control and
supervision powers over the fulfilment of concession, with specific concentration on the exercise of
the transferred state powers; and
• Lottomatica must apply in full the domestic and European Community laws when awarding to third
parties work, supply, or service contracts pertaining to carrying out the concession (for these
purposes, Lottomatica consortium partners were not considered as third parties for services).
In addition, in order to receive competitive bids for work or supply contracts, Lottomatica must
transmit the request for bids in advance to the Ministry of Economy and Finances which has the power of
supervision and control to ensure the absolute transparency of the bidding process. The term for the Lotto
concession is set at 9 years and is extendable only once for a term of the same length.
The following state functions have been transferred to Lottomatica:
• safekeeping of the mechanised matrices (also for the purpose of vigilance by the Ministry of
Economy and Finances over the normal procedure of the game);
• certification of validity of the bets;
• arrangement for the exclusion from drawing of bets;
• preparation of the drawing report for each wheel;
• identification, validation and determination relating amounts as to wins; and
• preparation of the official area bulletin containing the list of winning numbers.
According to Article 26 of the Ministerial Decree of March 17, 1993, the Lotto concession may be
revoked by the Ministry of Economy and Finances with a reasoned decree, in the event of violations by the
company holding the Lotto concession and/or by the occurrence for the same company of one of the
following situations:
• violation of domestic and European Community laws on tenders for work, supply, or service
contracts;
207
• exercise of the transferred public powers in a manner not corresponding to the public interest, as
protected by the public administration;
• failure to fulfill the obligation to ensure efficiency of the service, good quality of materials or
systems, their proper installation and excellent operation, as well as the obligation to maintain the
entire system in an efficient manner; and
• failure to maintain the requirements of proper guarantee regarding assets and technical and
organisational structure under letter (m) of the CIPE resolution of February 18, 1993.
Additional causes for revocation of the Lotto concession, by effect of the combined provisions of
Article 26, paragraph 1, letter (e) and Article 20 of the Decree of March 17, 1993, as modified by Article 4
of the Director’s Decree of November 15, 2000, are:
• failure to obtain the authorisation of the Ministry of Economy and Finances/AAMS, as required by
the Director’s Decree of November 15, 2000, for the acquisition, no matter how achieved, by third
parties other than the present Lottomatica shareholders, of the control of Lottomatica, pursuant to
Article 2359, paragraph 1, No. 1 of the Italian Civil Code; and
• failure to submit the appointment of Lottomatica’s Chairman of the Board of Directors, Managing
Director, General Manager, and Chairman of the Board of Auditors to the Ministry of Economy
and Finances for prior authorisation.
At the expiration of the Lotto concession, Lottomatica must transfer, free of charge to the Ministry of
Economy and Finances, at the latter’s request, the ownership of the entire automated system, including
terminals, systems, structures, availability of premises, files, and whatever is necessary for the operation of
the Lotto system.
Regulatory Developments and Additional Concession Decrees
Ministerial Decree of January 11, 1995 (integrating the Ministerial Decree of March 17, 1993)
transferred in favour of Lottomatica, the Ministry of Economy and Finance’s public powers pertaining to
the collection of game’s revenues, the payment of winnings, the drawings and the oppositions. Such Decree
provided in Article 6 that Lottomatica must apply in full the domestic and European Community laws
where awarding work, supply and service contract, for these purposes, Lottomatica consortium partners (as
of the date of such Decree), were considered third parties.
Ministerial Decree of July 25, 1995 (integrating the Ministerial Decree of March 17, 1993) provided in
Article 2 for the transfer to Lottomatica of the state powers cited above to be total and full. The activities
pertaining to the exercise of said powers are organised and managed by Lottomatica in full independence
and autonomy.
The regulations that govern Lotto, the subject of the Lotto concession, were issued with the Decree of
the President of the Republic of Italy No. 560 of September 16, 1996 (modified regarding payment of
winnings by Decree of the President of the Republic of Italy No. 240 of October 4, 2002). It regulates,
among other things, the relationship among the bet collection agents, the concession holder, and the
Ministry of Economy and Finances in relation to the payment of winnings, and drawing operations.
Broadly, bet collection agents pay to Lottomatica the amounts they collected (after deducting their
commission) and Lottomatica (after deducting its compensation) pays the total receipts to the Italian
Treasury Department. Payments for winnings up to Italian Lire 4.5 million, approximately A2,300, are made
by the bet collection agents; and payments for greater amounts are made by Lottomatica.
There are no formal dealings between Lottomatica and the bet collection agents, who receive
terminals from Lottomatica for use free of charge, and sign a contract with the Ministry of Economy and
Finances that regulates the concession relationship of Lotto’s bet collection agents. The Ministry of
208
Economy and Finances, in turn, instructs Lottomatica as to the bet collection points to be included in the
network, where the terminals are to be installed.
Ministerial Decree of January 30, 1997 instituted a second weekly drawing (every Wednesday) for the
game of Lotto.
Law No. 449 of December 27, 1997 (i) granted the Ministry of Economy and Finances the power to
provide, with its own decree, the methods for collecting Lotto bets other than those under Article 4,
paragraph 2 of Law No. 528 of August 2, 1982, and (ii) provided for the extension of the bet collection
network to all tobacconists who apply by March 1 of every year, as long as average yearly receipts are
guaranteed, in an amount to be set in agreement with the major national labor organisations in the
respective sectors.
Ministerial Decree of April 14, 1998 transferred to Lottomatica the public powers associated with
collection of the revenues from Lotto, payment of winnings, and declaration of exclusion of bets from the
drawing, effective from May 4, 1998.
Subsequently, with the Ministerial Decree of June 26, 1998, the Ministry of Economy and Finances’
state powers associated with drawing operations for Lotto were transferred to Lottomatica, effective
July 1, 1998.
Ministerial Decree of February 9, 1999 authorised the collection of bets by phone, by means of prepaid forms. This collection operation is performed by Lottomatica, which, for the purpose of the necessary
interconnections, must make its automated system available to all telecommunication operators interested
in that bet collection method (operators of telephony services serving the national territory that
demonstrated their availability, following a public notice to show interest by the company that holds the
concession).
The AAMS Directorial’s Decree of June 7, 2005 provided for the suspension of telephone collection
for the Lotto game over the entire national territory, in consideration of the need to find new regulatory,
technical and administrative methods for remote bet collection.
Director’s Decree of December 30, 1999 provided that, for the purpose of extending the Lotto bet
collection network required by Law 724/94 (as modified by Law 449/97), the appropriate concessions be
granted to all owners of a retailer of monopoly goods who applied for it on March 1, 1998 and March 1,
1999. Granting said concessions is carried out over a period of two years, based on a plan formulated by
the holder of the Lotto concession and approved by the AAMS.
In line with the provisions of Article 4 of the Ministry of Economy and Finances’ Decree of
November 8, 1993 (through which Article 9bis was introduced in the Ministerial Decree of March 17,
1993), in 1998 the Ministry of Economy and Finances determined, upon the completion of a complex
analysis conducted by a ministry-appointed commission (the ‘‘Ministerial Commission’’), the amount that
Lottomatica must pay to the Ministry, based on the savings projected by the Ministry with reference to the
new telecommunication technologies and the modifications introduced into the telecommunication
network by the network used (that is, the B.N.L. Multiservizi primary network and the Telecom Italia
S.p.A. secondary network).
The value of the savings and, as a result, the amount that Lottomatica agreed to pay to the Ministry of
Economy and Finances in the 1999-2003 period was set at Italian Lire 15,852,469,000 (equivalent to
A8,187,116.98), of which Italian Lire 15,295,500,000 (equivalent to A7,899,466.50) was for savings on the
B.N.L. Multiservizi primary network and Italian Lire 556,969,000 (equivalent to A287,650.48) was for
savings on the Telecom Italia S.p.A. secondary network.
209
Moreover, B.N.L. Multiservizi and Telecom Italia S.p.A. agreed to pay to Lottomatica, for the entire
1999-2003 period:
• as for Telecom Italia S.p.A., 100% of the value determined by the Ministerial Commission; and
• as for B.N.L. Multiservizi, 50% of the value determined by the Ministerial Commission
(approximately Italian Lire 7.6 billion). As a result, Lottomatica had to pay to the Ministry of
Economy and Finances the same amount of approximately Italian Lire 7.6 billion.
Article 9 of the Director’s Decree of November 15, 2000 (supplementing the Ministerial Decree of
March 17, 1993, regarding the grant of the concession to Lottomatica) provides for the savings from
operation of the Lottomatica concession holder’s telecommunications network, deriving from direct or
indirect rendering of services other than collection of Lotto game bets, after its having been determined by
a joint committee appointed by the General Manager of Government Monopolies, to be proportionally
returned every year to the Government of the Republic of Italy, beginning on the effective date of
aforementioned Decree, to the extent of the usage percentage, as verified by the aforesaid committee.
The value of said savings and, as a result, the amount that Lottomatica paid to the AAMS (imputed to
chapter 161 of the Administration’s revenue forecast status) was determined by the committee to be
A804,620.58 for the year 2002 and A668,213.78 for the year 2003.
AAMS Director’s Decree of November 15, 2000 integrates the prior concession Decrees, the
Ministerial Decrees of March 17, 1993 and November 8, 1993.
Pursuant to that Decree, Lottomatica was responsible for the increase in size of the Lotto game
network, as required by Article 33 of Law 724/94 and the Director’s Decree of December 30, 1999 by
approximately 20,000 bet collection points. Lottomatica fulfilled its obligations in a timely manner, as
shown in the report dated July 24, 2003 by the verification committee specially appointed by the AAMS.
The Decree also established that the cancellation provided for by Article 6, paragraph 3 of the Ministerial
Decree of March 17, 1993 could be declared by the Ministry of Economy and Finances only in the event it
verifies, seven months prior to the expiration date of the Lotto concession, any failure on Lottomatica’s
part in carrying out the technical activation of over 10% of the bet collection points indicated in specific
provisions by the Ministry and communicated to the concession holder with at least three months’ advance
notice.
Article 8 of the AAMS Director’s Decree of November 15, 2000 requires Lottomatica to bear the
investments to promote and advertise the game of Lotto up to at least 7% of the compensation received by
the concession holder for the previous year and specifically to submit in advance the annual promotion and
advertising plan to the Administration for approval.
Law Decree No. 452 of December 28, 2001, converted, with modifications, by Law No. 16 of
February 27, 2002, set (i) the minimum bet for the game of Lotto at A1.00 and the maximum bet at A200.00,
and (ii) the amounts of increases and the breakdown of bets, as well as the amount in euros of winnings
payable by the bet collection point or directly by the concession holder.
AAMS Director’s Decree of December 12, 2003, for the purpose of extending the collection network
for the game of Lotto required by Article 33, paragraph 1 of Law No. 724 of December 23, 1994, as
amended by Article 19 of Law No. 449 of December 27, 1997, awarded concessions to all individual
holders of a regular point of sale for monopoly goods who apply by March 1 of every year, save the limit of
35,000 bets collecting points.
Article 1, paragraphs 488-493 of Law No. 311 of December 30, 2004, established a single 6%
withholding on Lotto winnings, increased the jackpot for the combination of five winning numbers to six
million times the wager, and stipulated that the maximum prize that may be generated by a single play slip
may not exceed A6 million. It additionally provided for the introduction of the national drawing location,
210
the ‘‘determined drawing’’ combination, and the possibility of instituting a third weekly drawing for the
game of Lotto. Finally it has modified the winnings multiplier.
The AAMS Directorial Decree of March 1, 2005 provided for putting in place Lotto game collection
on the ‘‘determined drawing’’ combination, effective March 14, 2005.
The AAMS Directorial Decree of April 15, 2005 provided, effective May 2, 2005, for the collection of
the game on the national drawing location and that, beginning with the Lotto drawing of May 4, the
drawing for the Rome wheel would take place with electrically rotated drums.
The AAMS Directorial Decree of June 9, 2005 instituted on a trial basis for a period of four months,
beginning with the drawing following June 18, 2005, the third weekly drawing for the game of Lotto, later
finalised by the Director’s Decree of October 18, 2005.
The AAMS Directorial Decree of January 19, 2006 regulates the time of Lotto drawings.
Tris Toto Betting
Article 3, paragraph 77 of Law No. 662 of December 23, 1996 reserved the organisation and
management of games and bets associated with horse racing to the Ministry of Economy and Finances and
the Ministry for Agricultural Policies, which may attend to it directly or by means of public agencies or
companies selected by them. The same Article, in the next paragraph, provides for regulations to be issued,
subject to authorisation by the parliamentary committees having jurisdiction, to reorganise the operational,
organisational, tax, and sanctioning aspects of games and bets associated with horse racing, as well as
allocation of revenues.
The regulations mentioned above were adopted with Decree of the President of the Republic of Italy
No. 169 of April 8, 1998 (‘‘Presidential Decree 169/98’’), which reserves to the Ministry of Economy and
Finances, in agreement with the Ministry for Agricultural Policies, with a tender to be carried out in
accordance with European Community laws, the award of concessions for handling bets on horse racing
(with a national pari-mutuel system and fixed odds) to individuals and companies with suitable and proven
requirements, also with regard to their financial standing. Included among the types of bets that may be
placed on horse races is the TRIS. Article 2, paragraph 5 of the above-mentioned Presidential Decree
169/98 provided for the management of the TRIS bet and those similar to it to be awarded to a single
concession holder.
Ministerial Decree of April 20, 1999 (in agreement with the Ministry for Agricultural Policies)
approved the model agreement for the award of the services associated with collecting TRIS bets and
those similar to it with regard to the manner of acceptance and use of pari-mutuel system.
Directorial Decree of August 25, 1999 ratified the agreement entered into by the Ministry of Economy
and Finances, the Ministry for Agricultural Policies, and SARA BET regarding the methods for
performing the services associated with collection of TRIS bets and of bets of the same kind.
Ministerial Decree of October 21, 1999 set the technical specifications to be adopted by the
concession holders to manage horse racing bets.
Department of Revenue Directorial’s Decree of March 22, 2002 regulated financial flows associated
with the management of bets, operators’ reporting, and controls of betting operation and procedures.
Ministerial Decree of June 15, 2000 (in agreement with the Ministry for Agricultural Policies)
introduced telephone or computerised horse racing betting, implementing Article 4, paragraph 5 of
Presidential Decree No. 169/98.
Law No. 452 of December 28, 2001 (implemented through Law No. 16 of February 24, 2002) provides
that, effective January 1, 2002, one unit for TRIS and similar bets is A0.50 and the minimum bet is A1.00.
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The concession for the services pertaining to Tris was awarded, following a tender for bids, to Sara Bet
(Ministerial Decree of August 11, 1999). On the same date the Ministry of Economy and Finances and the
Ministry for Agricultural Policies, for the first part, and Sara Bet, for the second part, entered into an
agreement that regulates the procedure for the performance of the services associated with the collection
of Tris (agreement approved with the Ministerial Decree of August 25, 1999).
The concession holder Sara Bet entered into contracts with Lottomatica and Twin (as well as with
Snai) to provide the services associated with collecting Tris and similar bets. Based on that agreement,
Lottomatica and Twin agreed, among other things:
(a) to transmit to their own collection agents Sara Bet’s authorisation to accept Tris bets as well as
collect their participation;
(b) to make available to the Sara Bet concession holder their own collection network consisting of
authorised collection agents;
(c) to operate in the name and on behalf of the concession holder, according to the contractual
relationship between the concession holder and the collection agents; and
(d) to perform cash management services for the collection and payment of receivables from
collection agents.
Effective November 11, 2002, under authorisation by the AAMS and by virtue of a service agreement
with Sara Bet, Sisal will collect Tris bets on its own network. Beginning on June 1, 2004, the service is
carried out exclusively through Lottomatica because on that date the subsidiary Twin S.p.A. transferred to
Lottomatica the corporate division that includes the Tris national pari-mutuel Totalisation system.
On December 31, 2005 the concession granted to Sara Bet expired, therefore the agreement between
Lottomatica and Sara Bet was automatically terminated on the same date (Article 14).
In anticipation of the expiration of the Sara Bet’s concession, Article 1, paragraph 498 of Law No. 311
of December 30, 2004 provided:
(a) the establishing, by virtue of a directorial’s provision of the Ministry of Economy and FinancesAAMS, of a new pari-mutuel horseracing bets, organised in several formulas upon UNIRE’s
proposal; and
(b) that the same directorial’s provision shall implement rules for the new pari-mutuel horseracing
bets to be performed at the pool games network points of sale, at horseracing agencies and at the
horse racetracks.
On October 10, 2005, with a note No. 2005/0065023 UNIRE sent its proposal to the Minister of
Finance—AAMS.
Decree of the General Director of AAMS of October 26, 2005, established the technical regulations
for pari-mutuel horse-racing ‘‘Vincente Nazionale’’ and ‘‘Accoppiata Nazionale’’ bets, both of them
concern the Tris’ horseracing bet (Presidential Decree 169/1998).
Decree of the General Director of AAMS, of December 15, 2005, established the pari-mutuel
horseracing bets ‘‘Nuova Tris Nazionale’’, organised in several formulas according to Article 1, paragraph
498 of the Law No. 311 of December 30, 2004 concerning Tris’ horseracing bets.
Decree of the General Director of AAMS, of December 20, 2005, established the technical rules
concerning the pari-mutuel horseracing bets ‘‘Quartè Nazionale’’ and ‘‘Quintè Nazionale’’, concerning
Tris’ horseracing bets.
With note of December 23, 2005, No. 2005/11148/giochi/sco, AAMS, in compliance with the
provisions of the Law No. 311 of December 30, 2004, authorised Consorzio Lottomatica Giochi Sportivi
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(as concessionaire of Totocalcio), to accept the above mentioned horse-racing bets. The authorisation was
effective from January 2006.
Games of Chance and Toto Bets
Legal Framework
Listed below are the regulatory provisions for the above activity:
• Law No. 401 of December 13, 1989—Intervention in the illegal games and betting sector and
protection of fairness in sporting events;
• Decree of the President of the Republic of Italy No. 169 of April 8, 1998—Regulations containing
standards for the reorganisation of the organisational, operational, and tax controls for games and
bets associated with horse racing, as well for the allocation of revenues, pursuant to Article 3,
paragraph 78 of Law No. 662 of December 23, 1996;
• Ministry of Economy and Finances’ Decree No. 174 of June 2, 1998—Regulations containing
standards for the organisation and operation of a pari-mutuel system and fixed odds bets on sports
events organised by the CONI, to be adopted pursuant to Article 3, paragraph 230 of Law No. 549
of December 28, 1995;
• Directorial Decree of June 19, 1998—Selection of technical specifications to be adopted by the
concession holders for handling of sports bets;
• Directorial Decree of June 19, 1998—Approval of the model agreement to receive concessions for
the handling of sports bets;
• Directorial Decree of April 7, 1999—Approval of the expansion plan for the collection and
acceptance network of horse racing bets;
• Directorial Decree of April 20, 1999—Approval of the model convention to award the services
associated with Tris and bets similar to it from the standpoint of acceptance and totalisation;
• Directorial Decree of April 20, 1999—Approval of the model convention to award the services
associated with collection of pari-mutuel system and fixed odds bets;
• Law No. 133 of May 13, 1999, Article 16—Games;
• Ministry of Economy’s Decree No. 278 of August 2, 1999 and its subsequent amendments
(Pari-mutuel bets on sporting events);
• Directorial Decree of August 25, 1999—Ratification of the agreement entered into by the Ministry
of Economy and the Ministry of Agricultural Policies and Sara Bet S.r.l. in San Giorgio di Mantova,
concerning procedure for carrying out services associated with Tris and similar bets;
• Ministry of Economy and Finances’ Decree of October 21, 1999—Selection of technical
specifications to be adopted by the concession holders for handling of horse racing bets;
• Directorial Decree of December 21, 1999—Renewal of concessions for the collection of horse
racing bets pursuant to Article 25 of Decree of the President of the Republic of Italy No. 169 of
April 8, 1998;
• Decree of March 22, 2000—Implementation of Article 8, paragraph 4 of the agreement outline for
awarding services associated with the collection of Tris bets;
• Directorial Decree of April 11, 2000—Award of concessions for the handling of a national
pari-mutuel system and fixed odds wagering on horse racing;
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• Directorial Decree of June 15, 2000—Rules governing the telephonic or electronic acceptance of
horse racing bets, in accomplishment of Article 4, paragraph 5 of Decree of the President of the
Republic of Italy No. 169 of April 8, 1998;
• Ministry of Economy and Finances’ Decree No. 231 of July 12, 2000—Regulation containing
amendments and supplements to Ministerial Decree No. 174 of June 2, 1998;
• Law No. 388 of December 23, 2000 (Financial Law for the year 2001)—Article 41;
• Ministry of Economy and Finances’ Decree No. 156 of February 15, 2001—Regulation containing
the authorisation for the telephonic and electronic collection of bets associated with games, bets,
and pool games;
• Ministry of Economy and Finances’ Decree No. 219 of April 26, 2001—Regulations modifying
Decree No. 174 of June 2, 1998;
• Law No. 383 of October 18, 2001. This law provided, among other things, that, in order to optimise
government revenues from the sector, government functions in the matter of organisation and
operation of games, bets, and sweepstakes and the resources associated with them are reorganised
by means of one or more Decrees of the President of the Republic of Italy, to be issued pursuant to
Article 17, paragraph 2 of Law No. 400 of August 23, 1988, based on the following guiding criteria:
(i) elimination of duplication and overlapping of responsibilities, awarding said functions to a joint
structure; (ii) selection of said structure from existing bodies, or a body to be set up pursuant to
Article 8 and 9 of Legislative Decree No. 300 of July 30, 1999. Moreover, Law No. 383 of
October 18, 2001 provided for games, bets, and sweepstakes under paragraph 1 to be governed
taking into account the need to rationalise the existing information systems, by means of one or
more decrees by the Ministry of Economy and Finances, to be issued pursuant to Article 17,
paragraph 3 of Law No. 400 of August 23, 1988. The individual wager to participate in games, bets,
and pool games is set by a decree of the Ministry of Economy and Finances. Technical procedures
for games, bets, and sweepstakes are in any case set by means of a Directorial’s Decree;
• Law Decree No. 452 of December 28, 2001 (contemplated through Law No. 16 of February 24,
2002)—Articles 12 and 13;
• Directorial Decree of May 31, 2002—Rules governing the telephonic or electronic acceptance of
horse racing bets, in accomplishment of Ministerial Decree No. 156 of February 15, 2001;
• Inter-managerial Decree of June 6, 2002—Redefinition of the financial conditions for concessions
to collect bets;
• Inter-managerial Decree of August 2, 2002—Modifications to the Inter-managerial Decree of
June 6, 2002;
• Directorial Decree of November 6, 2002—Implementation of Article 4, paragraphs 5 and 6 of
Decree of the President of the Republic of Italy No. 169 of April 8, 1998. Institution of bets similar
to Tris;
• Law No. 289 of December 27, 2002 (2003 Financial Law)—Article 22, paragraphs 8-17;
• Law Decree No. 45 of March 21, 2003—Urgent provisions regarding UNIRE (Unione Nazionale
per l’Incremento delle Razze Equine/National Union for the Expansion of Equine Breeds) and
horse racing bets;
• Directorial Decree of April 3, 2003—Selection of additional activities that may be managed within
the scope of acceptance of horse racing and sports betting;
• Directorial Decree of April 10, 2003—Issue of authorisation to points of sale for pool games and
any other games associated with sports events;
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• Ministry of Economy and Finances’ Decree No. 179 of June 19, 2003—General rules for sportsbased pool games;
• Directorial Decree of July 9, 2003—Protocol for sports-based pool games;
• Directorial Decree of July 9, 2003—Indefinite suspension of ‘‘Totosei’’ and ‘‘Totobingo’’ pool
games;
• Law Decree No. 269 of September 30, 2003—Article 39;
• Inter-managerial Decree of October 10, 2003—Redetermination and methods for payment of
guaranteed minimums for holders of horse racing betting concessions;
• Directorial Decree of December 19, 2003—Extension of the deadline for submitting the
authorisation request for the sale of pool games for the year 2004;
• Directorial Decree of March 22, 2004—Extension of the deadline for submitting the authorisation
request for the sale of pool games for the year 2004;
• Directorial Decree of March 22, 2004—Participation procedure for Totocalcio, ‘‘9’’ and Totogol
sports-based pool games by means of special pool wagers;
• Directorial Decree of June 3, 2004—Regulation of bets on horse racing, implementing Article 4,
paragraph 5 of Decree of the President of the Republic of Italy No. 169 of April 8, 1998 and
Article 16, paragraph 2 of Law No. 133 of May 13, 1999;
• Directorial Decree of June 4, 2004—Reduction of the unified tax rate on pari-mutuel fixed odds
sports bets;
• Directorial Decree of June 11, 2004—Reduction of the unified tax rate on pari-mutuel fixed odds
horse racing bets and on the Tris and similar bets;
• Ministry of Economy and Finances’ Decree No. 228 of August 5, 2004—Regulation modifying
Ministerial Decree No. 179 of June 19, 2003 by the Ministry of Economy and Finances’ Decree,
which includes rules for sports-based pool games;
• Ministry of Economy and Finances’ Decree No. 229 of August 5, 2004—Regulations modifying
Ministerial Decree No. 278 of August 2, 2004, which includes rules regarding the institution of new
pari-mutuel and fixed odds betting, pursuant to Article 16 of Law No. 133 of May 13, 1999;
• Directorial Decree of October 25, 2004—Regulation of horse race betting;
• Directorial Decree of November 19, 2004—Technical rules for ‘‘Big Match’’ bets (pari-mutuel
wagers on sports events);
• Law No. 311 of December 30, 2004 Financial Law for the year 2005, Article 1, paragraphs 281-290;
• Directorial Decree of January 19, 2005—Identification of fixed odd and pari-mutuel sports events
under Article 2, paragraph 1 of Ministry of Economy and Finances Decree No. 278 of August 2,
1999 and its subsequent amendments;
• Directorial Decree of February 1, 2005—Regulation of technical requirements of ‘‘Big Show—
Sanremo 2005’’ pool game;
• Directorial Decree of February 1, 2005—Regulation of technical requirements of ‘‘Big Race—Bici’’
pool game;
• Directorial Decree of February 18, 2005—Extension of operation for Totip pool game;
Policies) of August 4, 2005—Introduction of ceiling for multiple reference bets;
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• Directorial Decree of October 20, 2005—Technical requirements for ‘‘Big Race—Sci’’ pari-mutuel
betting on skiing competitions;
Policies) of October 26, 2005—Extension of operation of Totip pool game;
• Directorial Decree of October 26, 2005—Technical regulations for pari-mutuel horse racing
• Directorial Decree of October 28, 2005—Game forms regulations for pari-mutuel horse racing
• Directorial Decree of November 17, 2005—Condition of managing the amounts due by the
concessionaires to AAMS, their allotment in the financial statement of the Administration, method
and timing of the payment to the legitimate holder, performance of accounting obligation of the
concessionaire deriving from the management of the new pari-mutuel horseracing bets;
• Directorial Decree of December 15, 2005—Set up of a new formula for pari-mutuel horse racing
‘‘Nuova Tris Nazionale’’;
• Directorial Decree of December 20, 2005—Regulations of technical requirements of ‘‘Quartè
Nazionale’’;
• Directorial Decree of December 23, 2005—Regulations of technical requirements of the coupons of
‘‘Vincente Nazionale, ‘‘Accoppiata Nazionale’’, ‘‘Nuova Tris Nazionale’’, ‘‘Quartè Nazionale’’ and
‘‘Quintè Nazionale’’;
• Directorial Decree of January 13, 2006—Acceptance of the fixed odd bets on sports and non sports
events of national and international relevance;
• Directorial Decree of January 11, 2006—Unit bets of pari-mutuel bets other than horseracing, set
forth in the Decree of Ministry of Finances No. 278 of August 2, 1999;
• Decree of the Ministry of Economy and Finances No. 110 of January 31, 2006—Regulation
containing amendments to the Decree of Ministry of Economy and Finances No. 179 of June 19,
2003 regulating the general rules for sports-based pool games, in accordance with Article 16 of Law
No. 133 of May 13, 1999;
• Directorial Decree of February 22, 2006—Regulations of technical requirements of ‘‘Big Race
Atletica’’; and
• Decree of Ministry of Economy and Finances No. 111 of March 1, 2006—Regulations concerning
fixed odds bets on sports events other than horseracing and on non sports events to be adopted in
accordance with Article 1, paragraph 286 of Law No. 311 of December 30, 2004.
Agreement for Awards in Concession
By means of a special selection government procedure, in June 2003 the AAMS selected three
concession holders to whom, by virtue of special agreements, were granted the ‘‘activities and functions
associated with pool games as well as other possible games linked with sports events’’. Among said
concession holders, Consorzio Lottomatica Giochi Sportivi—consisting of Lottomatica (85%), Totobit
(5%), Telcos S.p.A. (5%), and Consorzio Totocom/Agenzie On-Line (5%)—came in second, and on
June 5, 2003 it signed a concession agreement with the AAMS.
The activities and functions that are the subject of the Totocalcio concession pertain to pool games
(that is, pool games and sports-based games, as well as pari-mutuel system bets on events other than horse
racing) operating from the beginning of the 2003—2004 soccer season, as well as any other sports-based
game that the AAMS wishes or will wish to sell during the term of the concession through its points of sale
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GTECH HOLDINGS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
In certain product sale contracts (primarily the stand alone sale of lottery or video lottery terminals
and software deliverables that do not involve significant customization of software), we are not responsible
for installation. In these cases, we recognize revenue when all of the following criteria are met:
• Persuasive evidence of an arrangement exists, which is typically when a customer contract has been
signed
• The product has been delivered
• Our fee is deemed to be fixed or determinable and free of contingencies or significant uncertainties
• Collectibility is reasonably assured
In instances where installation is required and/or customer acceptance of the product is required,
revenue is deferred until installation is complete, and any acceptance criteria have been met.
Our typical payment terms under product sale contracts include customer progress payments based on
specific contract milestones with final payment due on or shortly after customer acceptance. We do not
generally offer our customers payment terms that extend substantially beyond customer acceptance. In the
rare case that we provide a customer with extended payment terms, we defer revenue equal to the amount
of the extended payment until it is received. Amounts received from customers in advance of revenue
recognition are recorded in Advance Payments from Customers in our Consolidated Balance Sheets.
Non-lottery transaction processing services
We offer high-volume transaction processing services outside of our core market of providing online
lottery services that consist of the acquiring, processing and transmission of commercial non-lottery
transactions. Such transactions include retail debit, credit and charge card transactions, bill payments,
electronic tax payments, utility payments, pre-paid cellular telephone recharges and retail-based programs.
We earn a fee for processing commercial non-lottery transactions that is transaction-based (a fixed fee
per transaction or a fee based on a percentage of dollar volume processed). We recognize these fees as
service revenue at the time a transaction is processed based on the net amount retained in accordance with
Emerging Issues Task Force Issue No. 99-19, ‘‘Reporting Revenue Gross as a Principal Versus Net as an
Agent.’’
Liquidated damage assessments
We record liquidated damage assessments, which are contractual penalties incurred due to a failure to
meet specified deadlines or performance standards, as a reduction of revenue in the period they become
probable and estimable. Liquidated damage assessments equaled 0.61%, 0.18% and 0.50% of our total
revenues in fiscal 2006, 2005 and 2004, respectively.
Stock-based compensation
We have stock-based compensation plans which are described in detail in ‘‘Note 19—Stock-Based
Compensation Plans.’’ We follow Accounting Principles Board Opinion No. 25, ‘‘Accounting for Stock
Issued to Employees’’ (‘‘APB 25’’) and related Interpretations in accounting for our stock-based
compensation plans and we have elected to continue to use the intrinsic value-based method to account for
stock option grants. We have adopted the disclosure-only provisions of Statement of Financial Accounting
C-8
• technical assistance to the retailer through remote assistance tools, call centers, as well as, where
necessary, on-site access;
• training of the retailer concerning the use of the technology made available by the concessionaire
itself, the gaming procedures, the proper management of terminals and of the respective diagnostics
messages, as well as the gaming techniques, the gaming product sales techniques, and the
monitoring of sales results;
• oversight of retailers, as well as administrative and commercial assistance to them for proper
management of the business;
• activation and sizing of the retailers network, through on-line and real-time connection to the
proprietary processing system;
• collection, in real time, after having received notice from the national totalisator of the opening of
the pari-mutuel wagering, of the data on the bets that were made at the retailers connected to the
concessionaire and the exchange of such data with the national totalisator;
• making of a portal for sports betting that, in addition to informational activity, also allows for the
acceptance of bets according to the minimum functional requirements stipulated in the respective
technical specification; and
• activation, which is optional and upon authorisation from the AAMS, of additional channels for the
collection of telephonic and remote bets.
Payment of Winnings
The concessionaire must see to payment of the winnings due from it to the winners with respect to
tickets played at the retailers connected to it, as well as on the winning bets made through its own portal
for sports betting, as of the day after the closing of the contest, under the terms provided for by the AAMS
General Director’s Decree.
Winnings in amounts not greater than A3,000 will be paid directly by every point of sale associated
with the concessionaire connected to the point where the winning ticket was sold. Winnings in amounts
greater than A3,000, up to a maximum of A100,000, will eventually be paid by the concessionaire out of the
concessionaire’s cash, according to the terms to be determined by the next AAMS measure on the
management of cash-flows. Winnings in amounts greater than A100,000 will be paid by the AAMS.
Term
The concession will have a term of four years as of the activity start date, being set, by a specific
measure, as August 1, 2003, and it will expire, accordingly, on July 31, 2007. The AAMS’s option to extend
the term of the concession for an additional year under the same terms and conditions as provided for in
the said concession will remain unchanged.
Compensation of the Concessionaire
The AAMS will pay the concessionaire compensation equal to 3.45% of the total receipts from bets
placed at the retail locations, while for bets made through the sports betting portal, the concessionaire’s
compensation will be equal to 4% of the total receipts; this latter percentage, however, may be subject, by a
subsequent AAMS measure, to a possible revision upward on the basis of the methods of payment
provided for bets made through the remote and/or, possibly, the telephonic channel.
The concessionaire will also receive the following payments from the retailer:
• a one-time payment of A3,500 for the activation of the connection to the processing system; this
payment may not be required from Toto collection points not equipped with a suitable betting
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terminal, for each of which the AAMS will pay the concessionaire, annually and for the entire term
of the concession, a contribution equal to A500; and
• an annual payment of A500 for the connection to the concessionaire’s processing system and for all
the services offered by the concessionaire for purposes of engaging in the activity of selling
pari-mutuel wagering.
Concession Fee
The concessionaire will be required to pay the AAMS, by July 31 of each year starting with the year
2003, as a concession fee, a sum equal to A500 times the number of retail locations connected to it as of
July 31. Deducted from this sum will be the amount of the contribution that the AAMS will attend to
paying for connection to the processing system for Toto collection points that are not equipped with any
betting terminal with the features provided for in the respective technical specifications.
Revocation of the Concession
The AAMS may proceed with revocation of the concession, in particular:
• if precautionary measures are adopted against the concessionaire’s legal representative or directors
or measures filing legal action against any of the above on any of the criminal grounds set forth in
Law No. 55 of March 19, 1990, or on any other criminal ground liable to cancel the fiduciary
relationship with the AAMS;
• in the event of nonobservance of the prohibition of assignment or subrogation, even in part, to the
concession;
• in the event of unauthorised suspension of activities; and
• in the event that the delay in passing on the proceeds, net of the winnings paid directly to users, is
greater than 15 days or in the event more than 10 cases of delay, of any duration, in the passing on
of such proceeds occur during the course of the term of the concession.
Developments of the Totocalcio concession
By addendum instrument dated May 13, 2004, the concessionaire undertook for the entire duration of
the concession, to perform specific promotional activities at its retailer points.
By addendum instruments dated August 4, 2004 and December 14, 2004, the AAMS redetermined the
amount of the guaranty provided by Consorzio Lottomatica Giochi Sportivi to be A15,000,000, which will
be increased to the extent of 5% at the end of every soccer season, starting with the 2005-2006 one, in the
event of an increase of at least 5% in the volume collected for bets involved in pari-mutuel wagering and
for the bets referred to in Article 1, paragraph 1 of Ministry of Economy and Finances Decree No. 278 of
August 2, 1999, as amended by Ministry of Economy and Finances Decree No. 229 of August 5, 2004.
By the above addendum instrument dated December 14, 2004, the provisions set forth in Ministerial
Decrees No. 228 and No. 229 of August 5, 2004, have been added by virtue of which, respectively:
(i) changes were made to the rules governing the sports-based pari-mutuel wagering referred to in
Ministerial Decree No. 179 of June 19, 2003 and (ii) the collection of pari-mutuel bets on sporting events
other than horse races and on non-sporting events were included with the activity of selling pari-mutuel
wagering.
By a supplementary subscribed instrument dated November 4, 2005, the Totocalcio concession was
added to the provisions set forth in the October 26, 2005 Directorial Decree, which introduced the
technical rules governing ‘‘Vincente Nazionale’’ and ‘‘Accoppiata Nazionale’’ toto horse-racing betting.
219
Guaranties
In observance of what is provided for in Article 16, paragraph (c) of the Totocalcio concession,
Consorzio Lottomatica Giochi Sportivi has seen to having a bank guaranty issued, in favour of the AAMS,
to secure proper performance of the activities and duties awarded, as well as to secure timely and proper
payment of the proceeds, net of the winnings paid directly to users, and of every other amount owed by the
concessionaire for any reason. As of the date of this Offering Circular, the amount of said guaranty is equal
to A15 million.
National Lotteries
Provided below is the legal and regulatory framework applicable to this activity. The Instant Lotteries
and the Traditional Lotteries are set up by a proper AAMS decree.
Legal and Regulatory Framework of Reference
• Decree of the President of the Republic of Italy No. 1677 of November 20, 1948 (and subsequent
amendments and additions) approved the regulations for the national lotteries ‘‘Solidarietà
Nazionale’’, ‘‘Lotteria di Merano’’, and ‘‘Italia’’;
• Law No. 722 of August 4, 1955 authorised the operation of four national lotteries a year;
• Law No. 62 of March 26, 1990, containing rules on the subject of lotteries, tombolas, and drawings
authorising the operation as of 1990 of national lotteries up to a maximum of twelve every year, as
well as of one international lottery, stipulated for profits to flow as revenue on the Government
Budget and of one-third of the profits to the municipalities organising events in combination with
national lotteries;
• Ministry of Finances Decree No. 183 of February 12, 1991 adopted the Regulations for National
Instant Lotteries;
• Law Decree No. 557 of December 30, 1993 (implemented by Law No. 133 of February 26, 1994)
Article 11 provides that the Ministry of Finances is authorised to award a concession for the
management of the lotteries by specific automated systems or by adding to the system activated for
the management of Lotto;
• Law Decree No. 452 of December 29, 2001 (implemented by Law No. 16 of February 27, 2002), in
Article 10, set the price for the sale of tickets for national traditional lotteries at A3.00 and the price
for national instant lottery tickets at A1.50;
• Law No. 200 of August 1, 2003, which introduced paragraph 5-bis under Article 1 of Law No. 722 of
August 4, 1955, provided for additional traditional lotteries ‘‘also for purposes of allowing
participation by telephone or remote connections, without association with events or with historical,
artistic, or cultural reenactments or with sports events’’;
• Ministry of Economy and Finances Decree of December 15, 2003 identified the events to be
combined with the national lotteries for the year 2004;
• Law No. 311 of December 30, 2004 (Financial Law year 2005) provided for in Article 1,
paragraph 292 that the Ministry of Economy and Finances/AAMS will govern lotteries, both
traditional and instant, with involvement at a distance determining the percentage distribution of
the game at stake with regard to the national treasury, the player, and third parties, as well as the
criteria and methods of operation of telephonic and remote lotteries; and
• Directorial Decree of March 29, 2006 has established that, as of June 1, 2006 of the instant draw
lottery tickets will fall between A0.50 and A10.00.
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Concession Award Agreement
Law Decree No. 557 of December 30, 1993, implemented by Law No. 133 of February 26, 1994,
authorised the Ministry of Finances to entrust under a concession the management of the lotteries and
other games administered by the Government by special automated systems or by inclusion of the system
activated for the management of Lotto.
Following the competitive tender carried out pursuant to the Legislative Decree No. 157 of March 17,
1995, the agreement for awarding a concession for the service of automated management of Traditional
and Instant National Lotteries was subscribed with the Ministry of Economy and Finances/AAMS dated
October 14, 2003 by Lottomatica as principal (with a share of interest equal to 63%) of the temporary
grouping set up by Arianna 2001, Servizi Base 2001 S.p.A., Olivetti S.p.A., and Scientific Games
International Inc.
By virtue of an addendum to the concession, subscribed on October 15, 2003, the Consorzio Lotterie
Nazionali, set up on December 10, 2003 by the same members of the aforesaid temporary grouping and
with the same respective shares of interest, was automatically subrogated to all the obligations of the
temporary grouping awarded the contract.
The term of the concession was set at six years as of March 15, 2004, insofar as Traditional Lotteries
are concerned (the date on which the AAMS ceased the management of the Traditional National
Lotteries), while it was set at six years starting May 31, 2004, insofar as the instant Lotteries are concerned
(the date on which the AAMS ceased the management of Instant Lotteries). The concession is renewable,
but it is not stated under what terms.
The purpose of the concession is the following activities:
• making and running an information system for the management of the lotteries;
• production, distribution, and sale of tickets;
• preparation of a ticket distribution and sales network capable of covering the entire national
territory;
• carrying out the national lottery promotion and advertising activities; and
• payment of the winning tickets, as well as recovery of profits for the national treasury.
The concessionaire is obligated:
• to fully observe the legal, contractual, and regulatory provisions in force on the subject of traditional
and instant national lotteries, as well as observing the measures that come to be issued by the
AAMS;
• to bear advertising expenses each year of no less than 1.5% of the annual gross receipts, with an
annual minimum of A5,165,000, up to a maximum investment of A25,823,000; and
• to pay the AAMS by the tenth day of each calendar month the amount of the national treasury’s
share of the profits for the tickets sold during the previous month (penalty equal to 10% of the
amount not paid for each day of delay in making the aforesaid transaction).
To guarantee performance of all the obligations deriving from the concession, the concessionaire is
required to provide, concurrently upon signing, for the first year, a guaranty of A25,822,845. On the date of
this Offering Circular, the concessionaire has issued bank guaranties for a total of A25,822,845.
Furthermore, to cover the risks associated with the payment of the winning tickets, the concessionaire
must enter into a special third-party civil liability policy, the amount of which may not be less than
A15,000,000.
221
The concessionaire is to be paid consideration at the rate of 12.37% on the first tier of gross annual
receipts (up to A533,500,000), pooling both the receipts for traditional lotteries, as well as those for instant
lotteries, taking into account the percentage decrease provided for the subsequent tiers as shown below:
• 2nd tier of receipts (from over A533,500,000 to A800,250,000) the rate for the 1st tier is reduced by
0.05% (12.32%);
• 3rd tier of receipts (from over (A800,250,000 to A1,067,000,000) the rate for the 2nd tier is reduced
by 0.1% (12.27%);
• 4th tier of receipts (from over A1,067,000,000 to A1,600,500,000) the rate for the 3rd tier is reduced
by 0.15% (12.22%);
• 5th tier of receipts (from over A1,600,500,000) the rate for the 4th tier is reduced by 0.2% (12.17%).
By means of a decree to be published in the Official Gazette of the Republic of Italy, the AAMS will
declare the forfeiture or revocation of the concession:
• if the requirements for the awarding of the concession as stated in the bidding terms are not met
any longer;
• in the event of the transfer of controlling share stakes in the company that directly holds the
majority of the temporary grouping without the prior consent of the AAMS;
• in the event of interruption of activity for causes not deriving from force majeure;
• if, in carrying out the activity, serious and repeated violations of the tax rules or laws are committed;
• if precautionary measures are adopted or legal action is filed against the concessionaire or the
company directors on any of the criminal grounds set forth in Law No. 55 of March 19, 1990 and on
any other criminal ground liable to terminate the fiduciary relationship with the AAMS;
• if the management is transferred without the prior consent of the AAMS; and
• if new criteria for the terms of management of lotteries should be provided for by legislative
provisions issued after the date of the concession, effective as of the effectiveness of the measures
issued.
The Tiers are annually adjourned in accordance with the ISTAT revaluation.
At the termination for any reason of the management, the concessionaire agrees to transfer, without
consideration to the AAMS, at its request, the ownership of the entire automated system, including the
equipment, including therein the terminals at all the collection points, the devices, structures, processing
programs, data files, and everything else used for the complete functioning, management and functionality
of the said system. For purposes of avoiding interruptions in service with regard to the functioning of the
automated system, the AAMS will also be entitled to be subrogated to or to request the assignment of the
contracts in existence on the management expiration date.
Video Lotteries
Regulatory Framework
Provided below is the legislative and regulatory framework applicable to this activity.
Article 110, paragraph 3 et seq. of the Royal Decree No. 773 of June 13, 1931 (known as Testo Unico
delle leggi di pubblica sicurezza, ‘‘TULPS’’) governs automatic, semiautomatic, and electronic diversion and
entertainment apparatuses and devices, determining the general features that make such apparatuses
suitable for lawful gaming.
222
NOTE 4—BUSINESS ACQUISITIONS (Continued)
The following table summarizes the estimated fair values of Spielo’s assets acquired and liabilities
assumed at the date of the acquisition (in thousands):
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Systems, equipment and other assets relating to contracts, net
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales-type lease receivables . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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$ 18,616
13,710
112,917
5,646
31,470
185
1,683
Total Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184,227
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,056
280
12,644
Total Liabilities Assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,980
Net Assets Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$163,247
Goodwill of $112.9 million, which is not deductible for income tax purposes, was assigned to our single
operating and reportable business segment, the Transaction Processing segment. Acquired intangible assets
of $31.5 million had a weighted average useful life of approximately 6 years at the date of acquisition as
follows:
Subject to amortization
Customer contracts . . . . .
Computer software . . . . .
Non-compete agreement .
Trademarks . . . . . . . . . .
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Weighted
Average
Period
Gross
Carrying
Amount
(in thousands)
7
4
5
4
$19,840
8,200
370
160
28,570
Not subject to amortization
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,900
$31,470
C-18
NOTE 5—INVENTORIES
February 25, 2006
February 26, 2005
(Dollars in thousands)
Raw materials . . . . . . . . . . . . . . . . .
Work in progress . . . . . . . . . . . . . . .
Inventoried costs related to long-term
Finished goods . . . . . . . . . . . . . . . . .
.......
.......
contracts
.......
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$19,465
37,157
25,606
5,796
$29,622
15,492
6,800
9,221
$88,024
$61,135
Inventories include amounts we manufacture or assemble for our long-term service contracts and
amounts related to product sales contracts, including product sales which are accounted for using contract
accounting.
Amounts received from customers in advance of revenue recognition totaled $63.8 million and
$42.9 million at February 25, 2006 and February 26, 2005, respectively, of which $33.3 million and
$25.3 million were associated with inventoried costs related to long-term contracts. These amounts are
included in Advance Payments from Customers in our Consolidated Balance Sheets.
NOTE 6—SYSTEMS, EQUIPMENT AND OTHER ASSETS RELATING TO CONTRACTS, NET
February 25, 2006
February 26, 2005
Land and buildings . . . . . . . . .
Computer terminals and systems
Furniture and equipment . . . . .
Contracts in progress . . . . . . . .
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Less accumulated depreciation . . . . . . . . . . . . . . .
$
1,182
1,436,750
176,440
50,889
$
1,182
1,407,134
186,891
30,407
1,665,261
972,716
1,625,614
905,176
$ 692,545
$ 720,438
NOTE 7—PROPERTY, PLANT AND EQUIPMENT, NET
February 25, 2006
February 26, 2005
Land and buildings . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . .
$ 44,303
127,871
38,751
$ 43,667
124,562
14,300
Less accumulated depreciation . . . . . . . . . . . . . . .
210,925
109,509
182,529
107,971
$101,416
$ 74,558
As described further in Note 9 ‘‘License Fee’’ and Note 16 ‘‘Guarantees and Indemnifications’’, under
our Master Contract with the State of Rhode Island, we are responsible for the development of a new
C-19
retail businesses where the apparatuses are installed, or with the possessor/operator of the apparatuses, or
with any other party authorised by the concessionaire to collect the bets.
The AAMS Circular No. 2005/COA/ADI of June 15, 2005 furnished some operating instructions
regarding the relationships set up between the concessionaire and the other operators involved
(managers—retailers); in particular, the circular qualified the concessionaire as in charge of public service
for all effects, specifying as necessary that ‘‘the parties that operate for the concessionaire in connection
with collecting bets engage in a public duty entrusted to them under maximum observance of the rules of
transparency, efficiency, and timeliness’’, and attributing, substantially, to the concessionaire the option to
request revocation of the permits for the apparatuses whose managers/possessors become guilty of serious
contractual defaults against it, such as to cause the cancellation of the contracts themselves.
Concession Award Agreement
By means of an appropriate selection procedure, the AAMS identified ten concessionaires in
June 2004, which, by virtue of appropriate agreements, were awarded the activation and operational
running of the network for remote management of lawful gaming by means of diversion and entertainment
apparatuses, as well as of the accessory activities and duties.
Among the aforesaid concessionaires, in third place in the ranking, was the temporary grouping
headed up by Lottomatica, which, on July 15, 2004, subscribed the video lotteries concession with the
AAMS, as principal, which was subsequently transferred, by means of an appropriate addendum dated
May 5, 2004, to the current concessionaire, the Videolot S.p.A. temporary grouping, to which Lottomatica
transferred, as of the same effective date, by virtue of an appropriate leasing agreement, the management
of the video lotteries business unit, for purposes of guaranteeing regular execution of the activities
awarded by concession. In December 2005 the videolottery ongoing concern was transferred by
Lottomatica to RTI Videolot S.p.A.
The purpose of the video lotteries concession is, primarily, the following activities:
• the activation of the network for remote management of lawful gaming, with remote network being
understood as the hardware and software that connects the gaming apparatuses to the processing
system (prepared by each concessionaire for the gathering, management, and control of all the
information and all the data regarding the apparatuses) and which connects the latter to the central
system, or to the specific processing system with which the AAMS manages and controls all the data
and information regarding the apparatuses furnished by the individual concessionaires’ processing
systems;
• the running of the aforementioned network;
• all the activities and duties associated, directly or indirectly, with remote management of the
entertainment and lawful gaming apparatuses through the apparatuses themselves; and
• the possible management of lawful gaming also through video terminals, or those entertainment
apparatuses, in accordance with the provisions of Article 110, paragraph 6 of the TULPS, whose
gaming functioning may take place also through network connection to a concessionaire’s
processing system, observing the technical rules preestablished by the appropriate regulatory
provisions.
The main obligations of the concessionaire include, without limitation, the following:
• the obligation to ensure all administrative obligations with regard to gaming apparatuses,
particularly with reference to requesting and obtaining operating permits (issued by the AAMS) for
the apparatuses that the concessionaire intends to connect to its own remote network;
225
NOTE 13—LONG-TERM DEBT (Continued)
4.75% Senior Notes
In October 2003, Holdings issued, in a private placement, $250 million principal amount of 4.75%
Senior Notes due October 15, 2010, all of which were subsequently exchanged for 4.75% Senior Notes due
October 15, 2010 registered under the Securities Act of 1933 (the ‘‘2010 Senior Notes’’). The 2010 Senior
Notes are unsecured and unsubordinated obligations of Holdings that are fully and unconditionally
guaranteed by GTECH and certain of its subsidiaries. Interest is payable semi-annually in arrears on
April 15 and October 15 of each year.
In conjunction with the 2010 Senior Notes offering, in October 2003, GTECH entered into three
interest rate swap contracts that effectively convert $150 million of the 2010 Senior Notes from a fixed rate
debt to a floating rate debt for the period October 15, 2003 to October 15, 2010.
4.50% Senior Notes and 5.25% Senior Notes
In November 2004, Holdings issued, in a private placement, $150 million principal amount of 4.50%
Senior Notes due December 1, 2009, and $150 million principal amount of 5.25% Senior Notes due
December 1, 2014 (collectively, the ‘‘Senior Notes’’). The Senior Notes were subsequently exchanged for
notes with otherwise identical terms registered under the Securities Act of 1933 (the ‘‘registered Senior
Notes’’). The registration statement was initially filed on January 12, 2005 and was declared effective by the
Securities and Exchange Commission on April 18, 2005. The registered Senior Notes are unsecured and
unsubordinated obligations of Holdings that are fully and unconditionally guaranteed by GTECH and
certain of its subsidiaries. Interest is payable semi-annually in arrears on June 1 and December 1 of each
year.
In conjunction with the Senior Notes offering, in November 2004, GTECH entered into three interest
rate swap contracts that effectively convert $50 million of the registered Senior Notes from a fixed rate to a
floating rate for the period November 2004 to December 2009 and $25 million of the registered Senior
Notes from a fixed rate to a floating rate for the period November 2004 to December 2014.
1.75% Convertible Debentures
In December 2001, Holdings issued, in a private placement, $175 million principal amount of 1.75%
Convertible Debentures due December 15, 2021 (the ‘‘Debentures’’). The Debentures are unsecured and
unsubordinated obligations of Holdings that are fully and unconditionally guaranteed by GTECH and
certain of its subsidiaries. Interest on the Debentures is payable semi-annually in arrears on June 15 and
December 15 of each year and accrues at an initial rate of 1.75% per year, subject to reset beginning
December 15, 2006 under certain circumstances. In no event will the interest rate be reset below 1.75% or
above 2.5% per year.
On or after December 15, 2006, we may redeem for cash, all or part of the Debentures at a
redemption price equal to 100% of the principal amount of the Debentures, plus accrued interest up to,
but not including, the date of redemption. Holders of the Debentures may require us to repurchase all or
part of their Debentures on December 15, 2004, December 15, 2006, December 15, 2011 and
December 15, 2016 at a price equal to 100% of the principal amount of the Debentures, plus accrued
interest. We may choose to pay the purchase price in cash, shares of our common stock, or a combination
of both. If we elect to pay any of the purchase price in shares, the number of shares we are required to
deliver is equal to the portion of the purchase price paid in shares divided by 95% of the fair value of the
C-26
The AAMS may cancel the video lotteries concession:
(a) in the event, subsequent to the stipulation of the concession agreement, for any reason the
nonexistence emerges of any requirement or element comprising the essential technical and
economic requirements for the awarding of the concession;
(b) in the event of failure to pass the test by September 13, 2004;
(c) in the event of failure to complete the activation of the network by December 31, 2004, and/or
failure to collect by that same date the number of gaming machines that the concessionaire
agreed to connect with a specific statement during the tender phase;
(d) if precautionary measures are adopted against the concessionaire’s legal representative or
directors or measures filing legal action against any of them on any of the criminal grounds set
forth in Law No. 55 of March 19, 1990, or for any other criminal ground liable to cancel the
fiduciary relationship with the AAMS;
(e) in the event of transfer of the concession or of shares of interest in the concessionaire’s capital
stock, made in violation of the provisions of Article 21 of the video lotteries concession;
(f) in the event of violations of the rules in force governing lawful gaming, ascribable to the
concessionaire’s responsibility;
(g) in the event of a delay of over 30 days in the payment of the Sole Government Treasury Draw
owed to the AAMS, equal to 13.5% of the sums bet through the apparatuses connected to the
concessionaire’s network for the video lotteries concession; and
(h) in any case in which the number of apparatuses connected to the remote network is lower than
the minimum number provided for as the requirement for participation in the selection
procedure, or 5,000.
In the event of the ascertainment of one of the grounds for revocation, the AAMS will see to notice by
means of a formal instrument, setting a deadline for regularisation.
For purposes of avoiding interruptions in the service for the functioning of the automated system, the
AAMS has the option of being subrogated to or requesting the assignment of the contracts in existence on
the management expiration date.
In compliance with Article 20 of the Concession Agreement, the concessionaire has obtained on its
behalf and in favour of AAMS the following bank guarantee:
• A11 million for the payment of the second advance installment of PREU (released by AAMS on
December 24, 2004);
• A3 million for the activation of the remote network (released by AAMS on March 16, 2006); and
• A14,404,343.21 for running the network.
The Concession Agreement provides that the activity of running the remote network of each
concessionaire may be started up only after a specific measure, the so-called network running decree,
which the AAMS will issue after having verified that the individual concessionaire has seen to completing
the network activation phase, or to completing remote connection of the apparatuses whose permits are in
the name of the concessionaire itself.
The Concession Agreements required the concessionaire to activate the remote network within
October 31, 2004, failure the concessionaire should have paid a penalty for late performance equal to
A20.00 for each day of delay and the Administration might have the right to terminate the concession.
227
On November 4, 2004, also after passing the network test performed by the AAMS, the latter issued
the concessionaire the provisional remote network running decree.
As of the date of this Offering Circular, the only thing contested by the AAMS comes from a note
dated November 26, 2004 in which, taking into account the failed completion of the network startup, the
penalty described above was applied, to be retroactive to November 4, 2004. This same note was found
along with a letter signed by eight other concessionaires wherein there was ample defense against the
application of this penalty. This defensive position was founded on the objective and inevitable technical
and commercially based causes, making the delay objectively not assignable to the concessionaires. No
further response or reply came from the AAMS regarding this note from the concessionaires.
Therefore, in consideration of the AAMS claim, Lottomatica recorded a debt to the AAMS on its
balance sheet for A1,220,000, representing the amount associated with the period running from
November 5 through December 31, 2004, as well as A1,180,000, representing the amount associated with
the period running from January 1 to February 28, 2005. Both of these amounts were transferred to RTI
Videolot with the lease contract for the business unit noted above. Please note that as of the date of this
Offering Circular, the aforementioned provisions have not been modified.
On February 2, 2006, AAMS issued a decree for the activity of running the above remote network, in
favour of concessionaire RTI Videolot.
Formula 101
Following is the description of the regulatory outline associated with Formula 101, even though, the
collection of bets for this game was suspended by Ministerial Decree dated March 1, 2004.
Article 16 of Law No. 133 of May 13, 1999 provides that the Ministry of Economy and Finances may
establish, even on a temporary basis, acceptance of new machines for straight or toto bets or associated
with sporting events other than horse racing and those competitions organised by CONI. For any toto bets,
the Ministry of Economy and Finances may provide for acceptance through retailers and concessionaires
of public games and Lotto, as long as a network of retailers is used that is linked through real time
information technology systems.
Ministry of Economy and Finances Decree No. 278 of August 2, 1999 provides, under Article 10, that
a Formula 101 toto bet will be instituted that is linked to the Formula 1 World Championship of
international car racing. The handling of these bets will be assigned to the Ministry of Economy and
Finances (Article 11, paragraph 1). Acceptance of bets ‘‘is assigned, based on the appropriate handling to be
determined in full adherence to national and community regulations, to public gaming concessionaires, pool
games and lotto that work within the national territory. These entities will make use of a network linked to a real
time automated system’’ (Article 11, paragraph 2).
The organisation of schedules, information collection and official notifications required to perform
the gaming and its promotion will be reserved, by appropriate regulations, to the FIA or to another entity
determined by it (Article 11, paragraph 6).
In adherence with the appropriate regulations approved by Ministerial Decree on April 5, 2000,
Lottomatica is performing a dual role as organisational coordinator (Ministry of Economy and Finances
Provision—March 30, 2000) and executor, handling acceptance of the bets placed in the Formula 101
(Ministry of Economy and Finances Provision—March 30, 2000), linked to the Formula 1 World
Championship of international car racing organised by the Federation International de l’Automobile.
The duration of this agreement is set at 6 years and is renewable in two-year periods for no more than
four years (Article 19 of the agreement).
The license fee is calculated on a scale of decreasing percentages of gross revenue brackets
(Article 22).
228
NOTE 15—COMMITMENTS AND CONTINGENCIES (Continued)
Criminal Allegations Against Certain Employees And Related SEC Investigation. As previously
reported, in late March 2004 federal attorneys with Brazil’s Public Ministry (the ‘‘Public Ministry
Attorneys’’) recommended that criminal charges be brought against nine individuals, including four senior
officers of CEF, Antonio Carlos Rocha, the former Senior Vice President of Holdings and President of
GTECH Brazil; and Marcelo Rovai, GTECH Brazil’s marketing director.
The Public Ministry Attorneys had recommended that Messrs. Rocha and Rovai be charged with
offering an improper inducement in connection with the negotiation of the 2003 Contract Extension, and
co-authoring, or aiding and abetting, certain allegedly fraudulent or inappropriate management practices
of the CEF management who agreed to enter into the 2003 Contract Extension. No other current or
former employee of the Company or GTECH Brazil has been implicated by the Public Ministry Attorneys.
Neither the Company nor GTECH Brazil is the subject of this criminal investigation, and under Brazilian
law (which provides that criminal charges may not be brought against corporations or other entities), we
cannot be subject to criminal charges in connection with this matter.
As previously reported, in June 2004, the judge reviewing these charges prior to their being filed
refused to initiate the criminal charges against the nine individuals, including against Messrs. Rocha and
Rovai, but instead granted a request by the Brazilian Federal Police to continue the investigation which
had been suspended upon the recommendation of the Public Ministry Attorneys that criminal charges be
brought.
The Brazilian Federal Police subsequently ended their investigation and presented a report of their
findings to the court. This report did not recommend that indictments be issued against Messrs. Rocha or
Rovai, or against any current or former employee of the Company.
The Public Ministry Attorneys have since requested that the Brazilian Federal Police reopen their
investigation. We understand that investigations by the Brazilian Federal Police are ongoing, including an
investigation respecting the award of, and performance under, the 1997 Contract and the 2000 Contract.
As previously reported, we are cooperating fully with the investigations by Brazilian authorities and
have encouraged Messrs. Rocha and Rovai to do the same.
In addition, as previously reported, we conducted an internal investigation of the 2003 Contract
Extension under the supervision of the independent directors of GTECH Holdings Corporation. The
investigation did not reveal any reason to believe that any of our current or former employees had
committed any criminal offenses.
Notwithstanding the favorable resolution of the Brazilian Federal Police’s initial investigation, on
January 31, 2006, a special investigating panel of the Brazilian congress issued a preliminary report and
voted, among other things, to ask the Public Ministry Attorneys to indict CEF President Jorge Mattoso and
more than 30 other people, including one current and three former employees of GTECH Brazil, alleging
that the individuals helped us to illegally obtain the 2003 Contract Extension. The report also recommends
that the 2005 Contract terminate, and not be extended by CEF, upon the expiration of the term of the 2005
Contract in May 2006. We find nothing in the congressional report to cause us to believe that any present
or former employee of the Company committed any criminal offense in connection with obtaining the 2003
Contract Extension. Nevertheless, there can be no assurance that the Public Ministry Attorneys will not
seek to indict or initiate criminal charges against one or more current or former GTECH Brazil employees
in the wake of the issuance of the congressional report, or that the final congressional report will not
request additional action against us.
C-32
As previously reported, the SEC began an informal inquiry in February 2004, which formal inquiry
and Rovai, and our involvement in the facts surrounding the 2003 Contract Extension, to ascertain whether
there has been any violation of United States law in connection with these matters. In addition, in
with the Company and the SEC. The Company has cooperated fully with the SEC and the United States
Department of Justice with regard to these matters, including by responding to their requests for
information and documentation.
To date we have found no evidence that the Company, or any of its current or former employees, has
violated any United States law, or is otherwise guilty of any wrongdoing in connection with these matters.
In light of the fact that our reputation for integrity is an important factor in our business dealings with
lottery and other governmental agencies, an allegation or finding of improper conduct by us or any of our
current or former employees that is attributable to us could have a material adverse effect on our results of
operations, business or prospects, including our ability to retain existing contracts or to obtain new or
renewal contracts within Brazil and elsewhere.
Civil Action By The Public Ministry Attorneys. As previously reported, in April 2004 the Public
Ministry Attorneys initiated a civil action in the Federal Court of Brasilia against GTECH Brazil; 17
former officers and employees of CEF; the former president of Racimec; Antonio Carlos Rocha; and
Marcos Andrade, another former officer of GTECH Brazil. The focus of this civil action is the contractual
relationship between CEF, GTECH Brazil and Racimec during the period 1994 to 2002. This civil action
alleges that the defendants acted illegally in entering into, amending and performing, the 1997 Contract,
and the 2000 Contract.
paid to us under the 1997 Contract and the 2000 Contract, and certain other permitted amounts, minus our
proven investment costs. The applicable statute also permits the assessment of interest and, in the
discretion of the court, penalties of up to three times the amount of the damages imposed. We estimate
that through the date of the lawsuit we received under the 1997 Contract and the 2000 Contract a total of
approximately 1.5 billion Brazilian reals (or approximately 702 million United States dollars at currencyexchange rates in effect as of February 25, 2006). In addition, although it is unclear how investment costs
would be determined for purposes of this lawsuit, we estimate that our investment costs through the date
of the lawsuit were approximately between 1.2 billion and 1.4 billion Brazilian reals (or approximately
between 562 million and 656 million United States dollars) at currency exchange rates in effect as of
February 25, 2006 in aggregate; however, these investment costs could be disputed by CEF, and are
ultimately subject to approval by the court.
As previously reported, we believe we have good and adequate defenses to the claims made in this
lawsuit. We intend to defend ourselves vigorously in these proceedings, which, we have been advised by our
Brazilian counsel, are likely to take several years, and could take longer than 15 years in certain
circumstances, to litigate through the appellate process to final judgment. It is our position that we were
appropriately awarded the 1997 Contract by CEF after a competitive procurement, and that at all times
since 1997, we have been appropriately compensated for services performed under valid contracts with the
CEF.
C-33
We plan to vigorously defend ourselves against the allegations made by TCU in the TCU Audit
Reports and the proceedings initiated by the TCU with respect thereto. We believe that we have good
defenses to the claims and determinations of the TCU. We further believe that the claims and
determinations of the TCU Audit Reports will, in essence, be merged into the civil action instituted by the
Public Ministry Attorneys described above, and are accordingly unlikely to represent an independent
potential source of liability for us. While we are unable to rule out the possibility that we will ultimately be
held liable in this matter, we believe that the outcome of this matter is not likely to have a material adverse
effect on our results of operations or business.
Serlopar Suit
As previously reported, in April 2002 Serlopar, the lottery authority for the Brazilian state of Parana,
sued our subsidiaries Dreamport Brasil Ltda. and GTECH Brazil in the 2nd Public Finance Court of the
City of Curitiba, State of Parana, under an agreement dated July 31, 1997, as amended (the ‘‘VLT
Agreement’’). Pursuant to the VLT Agreement, we agreed to install and operate video lottery terminals
(‘‘VLTs’’) in Parana. The Serlopar lawsuit alleges that we installed only 450 of the 1,000 VLTs that we were
allegedly obliged to install, and that we were overpaid, and failed to reimburse Serlopar certain amounts
alleged to be due to Serlopar, under the VLT Agreement. The Serlopar lawsuit seeks payment from us in
an amount (after adjustment for inflation and interest through February 25, 2006) equal to 124,252,740
Brazilian reals, or approximately 58 million United States dollars (at currency exchange rates in effect on
February 25, 2006), together with unspecified amounts alleged to be due from the defendants with respect
to general losses and damages (including loss of revenues), court costs and legal fees. We believe we have
good defenses to the claims made by Serlopar in this lawsuit, and intend to continue to defend ourselves
vigorously in these proceedings. We believe that the outcome of this suit will not have a material adverse
impact on our results of operations or business.
On January 10, 2006, the Company and Lottomatica announced that they had entered into an
agreement (the ‘‘Merger Agreement’’) pursuant to the terms and conditions of which Lottomatica has
agreed to acquire the Company for merger consideration equal to $35.00 in cash per Holdings share. Two
shareholder class action lawsuits were subsequently filed against us and our directors respecting this
proposed merger.
behalf of all others similar situated, v. GTECH Holdings Corporation, W. Bruce Turner, Robert M. Dewey, Paget
L. Alves, Christine M. Cournoyer, James F. McCann, The Rt. Hon. Sir Jeremy Hanley KCMG, Philip R.
County. This lawsuit generally alleges that the consideration to be received by our shareholders in
their fiduciary duties to our shareholders by approving the merger transaction on the basis of such
interest. The lawsuit further alleges that we aided and abetted the individual defendants in the breach of
their fiduciary duties to our shareholders by entering into the Merger Agreement. The complaint seeks
injunctive relief: (i) declaring the Merger Agreement to have been entered into in breach of the fiduciary
C-36
duties of the individual defendants, and therefore unlawful and unenforceable; (ii) enjoining the
defendants from proceeding with the Merger Agreement, including consummating the proposed
transaction, unless the defendants implement procedures to obtain the highest possible price for the
Company; and (iii) directing the individual defendants to obtain a transaction which is in the best interests
of our shareholders and to exercise their fiduciary duties to disclose all material information in their
possession respecting the proposed transaction prior to our shareholder vote on same. The complaint also
seeks to recover costs and disbursements from us and the individual defendants, including reasonable
attorneys’ and experts’ fees.
breached their fiduciary duties to our shareholders by reason of agreeing to consummate the merger
between the Company and Lottomatica on the basis of allegedly inadequate consideration and under
disclose details of the transaction to our shareholders. The complaint further alleges that Lottomatica
aided and abetted the individual defendants in such alleged breaches of their fiduciary duties. The
complaint seeks injunctive relief: (i) declaring the defendants to have breached their fiduciary duties
We plan to vigorously defend ourselves and our directors against the claims made in these lawsuits
which we believe to be without merit. Nevertheless, at the present time we are unable to predict the
outcome of these lawsuits.
In February 2005, GTECH Foreign Holdings Corporation, Argentina Branch (‘‘GFHC’’) and the
Company’s Argentina legal counsel, Dr. Jorge Perez of Perez, del Barba and Rosenblum, received
(‘‘BofA-North Carolina’’), in consideration for the payment of 1.4 million Argentina pesos. Upon maturity
of the CD, the agreement provided for BofA-North Carolina to pay 571,429 United States dollars to a
GFHC branch bank account in the United States. We understand that the central claim of the Argentina
Central Bank’s indictment will be that GFHC’s agreement with BofA was a transaction in which foreign
currency was transferred, in essence, from Argentina to the United States in violation of applicable
Argentina law.
C-37
paragraph 498 of Law No. 311 of December 30, 2004) ensuring that each concessionaire exclusively
markets payment instruments pertaining to the games operated by them; such activity is assessed at
a fee equal to 6% of the value of the payment instruments sold.
Furthermore, for years 2006 - 2008, the fee mechanism for Lotto, Enalotto, Totip pool games, sports
pool and pari-mutuel betting (Decree of the Ministry of Economy and Finances No. 278 of August 2, 1999)
Tris bet and the new horse racing bets operated in the new interactive channels as provided for by
Article 1, paragraph 498, of Law No. 311 of December 30, 2004, have been introduced on a trial basis. The
fee mechanism correlates to the collection level of the preceding year, based upon the following criteria:
through interactive channels is higher than A11.2 million, the fee for 2007 will be equal to 9% of the
collection; and
through interactive channels is higher than A11.6 million, the fee provided for in the prior bullet
point is confirmed for 2008 and subsequent years.
Furthermore, it provides that the Ministry of Economy and Finances/AAMS, with Directorial Decree
that must be issued within sixty days of enacting conversion Law No. 248, of December 2, 2005, establishes
regulations for the introduction of new games relating to Lotto and Superenalotto without changes in the
fee percentage, based upon the following principles:
• the amount wagered for every combination shall be equal to A0.50;
• the player’s return shall not be less than 50 percent of the total amount wagered;
• each new game must differ from those currently provided for Lotto and Superenalotto games;
• the introduction of instant prizes, which are cumulative with other point prizes; and
• the possibility to access the game remotely.
Finally, the same Decree establishes that, according to the provisions of Article 1, paragraphs 290-291,
of Law No. 311 of December 30, 2004, the Ministry of Economy and Finances/AAMS shall determine its
own provisions, the means for regulating the remote collection of bets, Bingo and lotteries using internet,
digital, cable and satellite television, as well as with fixed and mobile telephones within January 31, 2006.
In particular, new laws contemplate that the concessionaires for lotteries, sports pools and pari-mutuel
betting with collection systems in compliance with the technical and organisational requirements specified
by AAMS will be permitted to collect wagers in the new interactive channels, as provided for by Article 1,
paragraph 2 of Law No. 311 of December 30, 2004. A fee equal to 8 percent of the total amount collected
is allowed for such activities.
Law No. 266 of December 23, 2005, Article 1, paragraphs 535-537, establishes that, upholding the
powers of the judicially authority in the event that an action constitutes a crime, the Ministry of Economy
and Finances/AAMS shall communicate to the connectivity suppliers is the internet network or the
managers of other remote or telecommunication networks or to other related remote and
telecommunication service operators, situations of gaming, betting and pool game offers, using the abovementioned networks, having monetary winnings that lack franchises, authorisations, licenses or other
authorized qualifications, all of which are in violation of the rules and regulations of the law or of the limits
or regulations defined by the same Administration.
Those receiving the communications must inhibit the use of the networks, for which they are
operators or for which they supply services, for the development of games, bets or pool games, by adopting
the appropriate technical measures conforming to those established by one or more provisions of the
Ministry of Economy and Finances/AAMS.
In the case of violation to inhibit the use of the networks, a monetary fine ranging from A30,000 to
A180,000 shall be levied for each violation. The competent authority is the AAMS.
233
Law No. 266 of December 23, 2005, establishes that gaming machines can be activated also using
electronic payment machines as defined by the Ministry of Economy and Finances/AAMS provision. The
cost of the game cannot exceed A1, the maximum amount of each winning shall be A100, the minimum
length of the game shall be 4 seconds and the winnings shall be calculated on an overall cycle of 140,000
games instead of the current 14,000.
Furthermore, the introduction of gaming machines (so-called video terminals) has been provided for,
as part of the remote network, in Article 14 bis, paragraph 4, of the Decree of the President of the
Republic of Italy No. 640 of October 26, 1972, and subsequent amendments, that will be activated
exclusively with a link to a processing system belonging to the same network. For such gaming machines,
the following will be defined according to the regulation of the Ministry of Economy and Finances in
agreement with the Ministry of the Interior:
• the cost and method of payment for each game;
• the minimum percent of the collection to be devoted to the winnings;
• the maximum amount and the method of collecting the winnings; and
• the non-modifiable details of security, referring also to the processing system to which such devices
are connected.
The installation of automatic devices that pay out amounts of money is authorized only in retail shops,
collecting points or in places where games are allowed, according to Article 86 or 88 of TULPS, that have
the ad hoc authorisation provided for by paragraph 3 of Article 86 (Article 100, paragraph 3) and are
equipped with a remote connection according to the Decree of the President of the Republic of Italy
No. 640 of October 26, 1972, as amended, granting the operative reliability and the non modifiability of the
gaming and functioning data.
As of July 1, 2006, the tax burden on bets made with the gaming machines mentioned in Article 110,
paragraph 6 a) of TULPS, amounts to 12% of the bets;
• the Ministry of Economy and Finances shall establish by decree a tax burden on the gaming
machines mentioned in Article 110, paragraph 6 b) of TULPS, not lower than 8% nor higher than
12% of the bets;
• within July 1, 2006, the concession fee for running the remote network provided for by the
concession agreement is fixed at 0.8% of the bets placed; and
• within July 1, 2006, AAMS grants the remote network concessionaires a maximum compensation of
up to 0.5%, calculated on the necessary investments made to adapt the remote network and on the
basis of the service performance obtained through collection.
As of the date of this Offering Circular, the following implementing provisions, concerning the above
mentioned decrees have been enacted:
• Directorial Provision of February 7, 2006—dismissal of offers lacking authorisation for games,
lotteries, bets or pool games with cash winnings made through the remote network;
• Directorial Decree of March 15, 2006—implementation of Article 1, Paragraphs 535, 536, 537, 538,
of Law No. 266 of December 23, 2005, concerning the non-authorised offer through remote
connection of games, lotteries, bets or pool games with cash winnings;
• Directorial Decree of March 9, 2006—Introduction of the new optional game Superstar which is
connected to Superenalotto;
• Directorial Decree of March 21, 2006—Measures for the regulation of the remote collection of
wagers, bingo and the lotteries; and
234
• Directorial Decree of April 13, 2006—implementation of Article 1, paragraph 292 of Law No. 311,
granted to Consorzio Lotterie Nazionali the operator on an experimental basis, of lotteries using
inherent digital, cable and satellite television, as well as fixed and mobile shows.
Insolvency Laws
The following is a brief description of certain aspects of insolvency law in the Republic of Italy.
Lottomatica and its Italian subsidiaries (as well as any of its subsidiaries whose center of interests is
deemed to be the Republic of Italy) will be subject to Italian insolvency laws. Under Italian law, the
insolvency (insolvenza) of a company must be determined and declared by a court. Insolvency occurs when
a debtor is no longer able to regularly meet its obligations as they fall due. The following judicial
restructuring and bankruptcy proceedings are currently available under Italian law:
• Pre-Bankruptcy Composition pursuant to Bankruptcy Law. A company facing a financial crisis has
the option to seek an arrangement with its creditors, under court supervision. During the
Pre-Bankruptcy Composition, all actions by creditors are stayed and the company is managed under
the supervision of a court-appointed official; extraordinary transactions must be authorised by the
court. The Pre-Bankruptcy Composition proposal may provide for all or any of: (i) the division of
creditors into different classes; (ii) the differential treatment of creditors in different classes; (iii) a
restructuring of the subject company’s debt in any form, including a debt-for-equity exchange; and
(iv) the transfer of the subject company’s assets to an assignor (which may be one or more of the
company’s creditors, or a corporation specifically established during the procedure for the purpose
of offering its shares to the creditors pursuant to the Pre-Bankruptcy Composition). The feasibility
of the composition arrangement must be confirmed by an expert’s report. The Pre-Bankruptcy
Composition proposal must be approved by unsecured creditors holding a majority (by value) of the
claims recognised as having the right to vote by the court-appointed official (or, in the case of
disputed claims, by the court on a provisional basis), or, if unsecured creditors are divided into
classes, by creditors holding a majority (by value) of the recognised claims in each class, and must be
ratified by the court. Once approved by creditors, and ratified by the court, the Pre-Bankruptcy
Composition is binding on all creditors. If the Pre-Bankruptcy Composition fails, the company, if
found insolvent, is declared bankrupt by the court.
• New Extraordinary Administration pursuant to Law No. 39 of February 18, 2004, as amended. A
company in a state of economic and financial crisis that (i) has had not fewer than 500 employees
for at least one year, and (ii) has indebtedness, including obligations arising from guarantees, in an
aggregate amount of at least A300 million, may be admitted to the New Extraordinary
Administration. During such proceeding, which provides for a two-year restructuring plan, actions
by creditors are generally stayed, and the company is managed by an extraordinary trustee,
appointed by the Italian Minister of Production Activities. The restructuring plan may include a
composition proposal providing for all or any of the options discussed above with regard to the
Pre-Bankruptcy Composition. Again, the proposal must be approved by creditors holding a majority
(by value) of the process claims, or, if creditors are divided into classes, by creditors holding a
majority (by value) of the recognised claims in each class, and must be ratified by the court. If the
proposal is rejected, the extraordinary trustee may implement a divestiture plan. If the divestiture
plan cannot be successfully carried out, the company is declared bankrupt by the court. In addition,
at any time during the proceeding, the court may convert the proceeding into a Bankruptcy
Proceeding if the New Extraordinary Administration process can no longer be usefully carried out.
• Prodi-bis Extraordinary Administration pursuant to Legislative Decree No. 270 of July, 1999. A
company in a state of economic and financial crisis having (i) more than 200 employees for at least
one year and (ii) aggregate indebtedness of not less than two-thirds of its assets and of its annual
revenues from sales and services, may be admitted to Prodi-bis Extraordinary Administration which
provides for a one-year divestiture plan or a two-year restructuring plan. At any time during the
235
proceeding, the court may convert the proceeding into a Bankruptcy Proceeding if the Prodi-bis
Extraordinary Administration process can no longer be usefully carried out.
• Court-supervised temporary controlled administration (amministrazione controllata) (the
‘‘Controlled Administration’’), which will be superseded following the enactment of the Bankruptcy
Law Reform, which is expected to come into force shortly. A company (regardless of its size) facing
significant but temporary financial or liquidity problems can request to be placed in controlled
administration for a period of up to two years. Company management generally operates under the
direction and supervision of the court and frequently, the supervision of a court-appointed official.
The company will be declared bankrupt if it appears that the Controlled Administration is
ineffective or likely to be unproductive.
• Bankruptcy Proceeding (fallimento) pursuant to the Bankruptcy Law. The debtor, a creditor or a
public prosecutor may apply to an insolvency court for the commencement of the Bankruptcy
Proceeding. Once it has begun, all actions of creditors are generally stayed and creditors are
required to file claims with the court. The company is managed by a court appointed bankruptcy
trustee, and any action taken by the debtor with respect to a creditor after a declaration of
bankruptcy is ineffective. The proceeds from the liquidation are distributed in accordance with
statutory priority provisions regarding the payment of certain preferred creditors, including
employees, the Italian tax authorities and social security administrators. The Bankruptcy Law
Reform, which will take effect shortly, has simplified and shortened the bankruptcy proceedings and
has increased the powers of the statutory creditors’ committee, which, inter alia, as from that date
will be in charge of authorising any extraordinary administration transaction to be carried out by the
bankruptcy trustee in managing the bankrupt estate.
• Post-bankruptcy composition with creditors (concordato fallimentare) (the ‘‘Post-Bankruptcy
Composition’’) pursuant to the Bankruptcy Law. The Bankruptcy Proceeding can be terminated
prior to liquidation by a debtor filing a petition with the insolvency court for a post-bankruptcy
arrangement with creditors. The Post-Bankruptcy Composition has been amended by the
Bankruptcy Law Reform and, following the enactment of such law, will mirror the Pre-Bankruptcy
Composition in several instances, including the possibility to propose a similar restructuring plan.
Until the entry into force of the Bankruptcy Law Reform, a Post-Bankruptcy Composition proposal
must be approved by the majority (in number) of unsecured creditors, representing at least
two-thirds of the aggregate value of the claims recognised by the court. As from the effective date of
the Bankruptcy Law Reform, approval of the Post-Bankruptcy Composition proposal will be
governed by provisions substantially similar to those of the Pre-Bankruptcy Composition. Once
approved by creditors, and ratified by the court, the Post-Bankruptcy Composition is binding on all
creditors. If the Post-bankruptcy Composition fails, the bankruptcy proceeding is reopened.
Out-of-court restructurings. A new procedure permitting a debtor to file a petition with the court for
the ratification and enforcement of an out-of-court-restructuring has recently been introduced by Law
Decree No. 35 of March 14, 2005, enacted as Law No. 80 of May 14, 2005. Such petition may be filed only
if (i) creditors holding at least 60% of the subject company’s outstanding debt have agreed to the proposed
restructuring, and (ii) an expert’s report ensuring the feasibility of the restructuring (including the regular
payment of creditors who have not agreed to the proposed restructuring) is also filed with the court.
Creditors and interested third parties may oppose the restructuring within 30 days of the publication of the
petition in the Companies’ Register. Once the court has ruled on any such opposition, it can ratify the
out-of-court-restructuring.
Statutory priorities. The highest priority claims (after payment of the costs of the proceeding) are the
claims of preferential creditors, which include the claims of the Italian tax authorities and social security
administrators and claims for employee wages.
Avoidance powers in insolvency. The ‘‘claw-back’’ or avoidance provisions under Italian law may give
rise to the revocation of payments or grants of security interests made by the debtor prior to the
236
NOTE 23—INCOME TAXES
Income before income taxes is based on the geographical contract source of income (rather than the
location where the income is taxed) and consists of the following:
February 25, 2006
United States . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . .
Fiscal Year Ended
February 26, 2005
February 28, 2004
$ 52,538
265,838
$ 24,466
281,920
$ 37,355
253,439
$318,376
$306,386
$290,794
Significant components of the provision for income taxes were as follows:
February 25, 2006
Fiscal Year Ended
February 26, 2005
February 28, 2004
Current:
Federal . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . .
$ 49,480
2,862
41,398
$ 12,254
6,892
56,106
Total Current . . . . . . . . . . . .
93,740
75,252
Deferred:
Federal . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . .
$
6,800
569
6,222
$ 44,007
2,532
(11,799)
$ (4,145)
5,877
46,405
48,137
$ 58,510
3,049
(2,102)
Total Deferred . . . . . . . . . . .
13,591
34,740
59,457
Total Provision . . . . . . . . .
$107,331
$109,992
$107,594
C-48
MANAGEMENT
The Board of Directors
The following table sets forth information on Lottomatica’s directors:
Name
Renzo Pellicioli . . . . . . . . .
Rosario Bifulco . . . . . . . . .
Marco Sala . . . . . . . . . . . .
Antonio Belloni . . . . . . . . .
Pietro Boroli . . . . . . . . . . .
Severino Antonio Salvemini
Paolo Ceretti . . . . . . . . . . .
Paolo Gugliemo Luigi Ainio
Marco Boroli . . . . . . . . . . .
Marco Drago . . . . . . . . . . .
Roberto Drago . . . . . . . . . .
Pier Luigi Celli . . . . . . . . .
Antonio Tazartes . . . . . . . .
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Date of Birth
Position
July 29, 1951
September 14, 1954
March 23, 1959
March 24, 1950
November 21, 1957
October 21, 1950
February 21, 1955
August 26, 1962
August 25, 1947
February 11, 1946
January 3, 1951
July 8, 1942
May 20, 1959
Chairman of the Board of Directors
Chief Executive Officer
Board Member and Managing Director
Board Member
Board Member
Independent Board Member
Board Member
Board Member
Board Member
Board Member
On December 22, 2005 the Board of Directors of Lottomatica named an Executive Committee
composed of the following persons:
Name
Rosario Bifulco .
Renzo Pellicioli .
Paolo Ceretti . . .
Marco Drago . . .
Antonio Tazartes
Marco Sala . . . .
Antonio Belloni .
Position
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Chief Executive Officer and Chairman of the Executive Committee
Chairman of the Board of Directors
Board Member
Board Member
Board Member
Board Member
Board Member
W. Bruce Turner, currently GTECH’s President and Chief Executive Officer, Robert E. Dewey,
GTECH’s Chairman of the Board, James F. McCann, a GTECH director and Anthony Ruys, a GTECH
director, are expected to join the Board of Directors of Lottomatica upon completion of the Acquisition,
subject to the relevant ministerial authorization as required by Lotto concession provisions. Lottomatica
currently intends to nominate Mr. Dewey as Vice-Chairman of the Board of Directors, and also has invited
Sir Jeremy Hanley, a GTECH director, to join the Board.
With the exception of the directors referred to in the preceding paragraph who are expected to join
Lottomatica’s Board of Directors upon completion of the Acquisition, each of Lottomatica’s directors was
elected at a meeting of the shareholders of Lottomatica held on December 16, 2005 and begun his term as
board member on the effective date of the merger of New Lottomatica and FinEuroGames S.p.A. into
NewGames S.p.A. (December 20, 2005). Such appointments will expire upon approval of the balance sheet
for the fiscal year ending on December 31, 2007. The address for each of the members of the Board of
Directors and their legal domicile is c/o Lottomatica, Rome, Viale del Campo Boario 56/D, Lottomatica’s
corporate headquarters.
The Chief Executive Officer Rosario Bifulco intends, after the completion of the Acquisition, to
resign from his position as Chief Executive Officer of Lottomatica.
In addition, Lottomatica intends to appoint Marco Sala as Chief Executive Officer in charge of Italian
activities.
238
Senior Management
The following table sets forth information on Lottomatica’s senior management:
Name
Marco Sala . . . . .
Emanuela Chiti .
Fabio Celadon . .
Claudia Ricchetti
Date of Birth
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Gabriella Fabotti . . . . . . . . . . .
Mario Bondone . . . . . . . . .
Giovanni Rando Mazzarino .
Andrea Faelli . . . . . . . . . . .
Fabrizio Feliziani . . . . . . . .
Giuliano Frosini . . . . . . . . .
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February 20, 1965
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March 19, 1950
November 21, 1955
April 13, 1967
October 5, 1953
September 18, 1968
Federico Tasso . . . . . . . . . . . . .
Massimo Palumbo . . . . . . . . . . .
Renato Ascoli* . . . . . . . . . . . . .
September 23, 1957
January 30, 1964
December 13, 1961
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March 23, 1959
June 22, 1955
May 3, 1971
July 10, 1965
Position
Managing Director
Audit, Quality and Security Director
Finance Director
General Counsel and Company Secretary
Director
Planning, Administration, and Control
Director
Director of Resources and Shared Services
Head of IT and Operations
Director of Sales
International Relations and Development
Head of External Communications and
Corporate Image
Head of Services
Director of Contact Center
Head of Games
Starts May 15, 2006.
W. Bruce Turner, Walter G. DeSocio and Jaymin B. Patel are expected to become executive officers of
Lottomatica upon completion of the Acquisition as Chief Executive Officer, Chief Administrative Officer
and Chief Financial Officer, respectively. They will also keep their current positions within GTECH.
Biographies of Directors and Senior Management of Lottomatica
Certain biographical information relating to the members of Lottomatica’s Board of Directors and
senior management is set forth below:
Renzo Pellicioli is the Chairman of the Board of Directors. He is a consultant with Xantos S.a.S. in Paris.
He has served on the Board of Directors and Executive Committee of De Agostini since 2003 and is a
Director and member of the Executive Committee of Toro Assicurazioni S.p.A. He served as the Director
of the Gruppo Telecom Italia Business Unit. In addition, in 1997 he served as the Chief Executive Officer
of Seat Pagine Gialle S.p.A. Prior to that time he served as General Director of Advertising and Vice
General Director of the magazine division of the Mondadori Group, General Director of the Costa
Crociere Group. He began his career as a journalist at the Giornale di Bergamo daily newspaper and then
went on to become director of programming at Bergamo TV. He was also a director of various television
networks from 1978 to 1984.
Rosario Bifulco is a Director and Chief Executive Officer of Lottomatica. He has held a number of
positions with Techint Group since 1993, including Managing Director of Techosp and Humanitas
Mirasole, Manager of the Hygiene and Consulting Engineering and Services Departments, member of
Techint Europe’s Presiding Committee, member of the Board of Directors of Techint SIV, Pomini, Dielve
and Medsystem, member of Techint Group’s International Management Committee and Executive Vice
President of the European Division. He has served as a member of the Management Committee of
Magneti Marelli and of the Management Board of CIRSEA, deputy Manager of the Bus Division of
IVECO Fiat, Manager of Coordination and Development at FIDIS, Manager of the Accessories Division
at Gilardini Turin (while also taking over the department of Auto Component Consolidation and the
marketing and sales department of Gilardini as a whole for the non-captive market). He holds a degree in
mechanical engineering and a Master’s degree in Business Administration.
239
Marco Sala is a Board Member and Managing Director of Lottomatica. He joined Kraft in 1985 where
he covered different responsibilities in the Marketing Area. In 1993 he became Marketing Director of the
Fresh Food Division and two years later he took on the position of Sales Director for the same division.
From 1997 to March 2001 he worked for Magneti Marelli (a FIAT Group company) with the responsibility
of the Spare Parts Division. Two years later, he expanded his responsibility also to the Lubricants Division.
In April 2001 he joined SEAT Pagine Gialle as the Head of the Directories Business for the Republic of
Italy. In November he became responsible for the Directories Business Area, managing also the
international companies: Thomson (U.K.), Euredit (France) and Kompass (the Republic of Italy). After a
short assignment as CEO for Buffetti, in March 2003 he joined Lottomatica. He holds a degree in
Business & Economics at Bocconi University.
Antonio Belloni is a member of Lottomatica’s Board of Directors. He has held a number of positions
with the De Agostini Group since 1998. Presently he is the Vice-President-Chief Executive Officer and a
member of the Executive Committee of De Agostini S.p.A., a Director and member of the Executive
Committee of De Agostini Editore S.p.A., Chairman of the Board of Directors and of the Administration
Committee of Toro Assicurazioni S.p.A., President and Managing Director of De Agostini Partecipazioni
S.p.A., Director and member of the Executive Committee of Coeclerici S.p.A. From 1990 until 1998 he
served as Managing Director of Camfin S.p.A. Prior to that time, he served as Managing Director of
Andrea Merzario S.p.A. of Genoa, Bassetti International S.p.A. and he has served as General Director and
member of the Board of Directors of Gruppo Bassetti S.p.A. He holds a degree in Business and
Economics with honors from the University of Genoa.
Pietro Boroli is a member of Lottomatica’s Board of Directors. He has been the Chairman and a
member of the De Agostini Editore Executive Committee since 2003 and chairs numerous companies
belonging to the Publishing Group, of which he is also Administrator. He is also a Director of m-dis
Distribuzione Media S.p.A. and Mikado Film S.p.A. He has been the General Director of the De Agostini
Geographic Institute since 1993. He has been a member of the Board of Directors of the De Agostini
Geographic Institute since 1986, managed many De Agostini magazines, and has been a freelance
journalist since 1987. He is currently active in various De Agostini companies and associations, is a
member of the Fieg Presiding Committee and Chairman of the FIEG Advertising Committee. He has been
with the De Agostini Group since 1979 and he has held a number of positions, including Advertising
Director in 1984, Sales Manager in charge of paperback books and magazines in 1985, and Director of the
Collector’s Division in 1990. He holds a degree in Political Science, with an emphasis in Economics, from
the University of Pavia.
Severino Antonio Salvemini is a member of Lottomatica’s Board of Directors. He has held, and continues
to hold, numerous academic and non-academic posts since 1975. He is currently professor of Business
Management at the Bocconi University of Milan and director of the Degree Course in Economics for the
Arts, Culture and Communication at this university. He has been the Chairman of the Board of Mikado
S.p.A. since 2002. He has written several books and articles and has been listed in the Register of
Freelance Journalists since 1988, the year in which he was awarded the National Prize for Organisational
Development by AISL (the Italian Association for Labor Research). He holds a degree in Business
Management with honors.
Paolo Ceretti is a member of Lottomatica’s Board of Directors. He has been General Director of De
Agostini since 2004 as well as a Director and Member of the Finance Committee of Toro Assicurazioni
S.p.A., DEA Factor S.p.A., De Agostini Editore S.p.A., De Agostini Holdings S.p.A. In March 2002 he
became the Managing Director and General Director of Global Value S.p.A. From 1993 to 1999 he was
Director of Strategic Planning and Development for Ifil S.p.A. in Turin and went on to become the
Managing Director and General Director of Ciaoholding/Ciaoweb in Milan. He held a number of
significant positions with the FIAT Group in Turin from 1996 to 2002. He earned the title of Doctor in
Accounting and he is a certified public accountant registered with the Italian Institute of Auditors and he
holds a degree in Business and Economics with honors.
240
Paolo Guglielmo Luigi Ainio is a member of Lottomatica’s Board of Directors. He serves as General
Director of Mediapolis, formerly known as Media and Communication Services, which merged with Aino
Media, a company he founded in 1988. He founded Matrix Company in 1995 and served as its Managing
Director until 2002. Commencing in 1994, he serves as Managing Director of CIA Medianetwork. He has
also served as a General Director of Centro Media.
Marco Boroli is a member of Lottomatica’s Board of Directors. In 1975 he became a manager of
Lottomatica and in 1978 he was named General Vice Director. In 1983 he became the General Director
with the responsibility for the management of the book sector. In 1986 he was named Delegate Director
and in 1990 Vice President. He became the President of the De Agostini Geographical Institute in
May 1996. Dr. Marco Boroli assumed the role of deputy Vice President of the parent company holding De
Agostini S.p.A. in March 1999 and he is a member of the executive committee of De Agostini S.p.A.
Within the Group he is also the President of De Agostini Book Marketing, board member and member of
the executive committee of Lottomatica S.p.A. and De Agostini Editore S.p.A., and board member of Toro
Assicurazioni S.p.A. He holds a degree in Political Science.
Marco Drago is a member of Lottomatica’s Board of Directors. He is the President of De Agostini, the
De Agostini Group Holding Company, and a member of the Board of Directors of a number of De
Agostini Group companies. He is currently also President and a member of the De Agostini Executive
Committee, Director and member of the Executive Committee of De Agostini Editore S.p.A.,
Administrator and member of the Executive Committee of Toro Assicurazioni S.p.A., Administrator of De
Agostini International BV and of Editions Atlas (France) S.a.S., Vice President of Grupo Planeta De
Agostini S.L., Director of Antena 3 de Television S.A. (Spain), Techosp S.p.A., and Vice President of De
Agostini Communications S.A. He has been with the De Agostini Group since 1969 and has held a number
of positions with the De Agostini Group. He holds a degree in Business and Economics.
Roberto Drago is a member of Lottomatica’s Board of Directors. He is Vice President and member of the
Executive Committee of De Agostini, President of DEA Factor S.p.A., Vice President of De Agostini
Invest S.A., Director of De Agostini Editore, Grupo Planeta De Agostini S.L. and Finanziaria Canova
S.p.A., Director and member of the Executive Committee of Toro Assicurazioni S.p.A., and the Director of
Banche Popolari Unite S.p.A. and BPU Banca International S.A. He has been with the De Agostini Group
since 1976 and has held a number of positions within the group, including Vice President of the Finance
Division of De Agostini S.p.A., Executive Vice President, General Director of Finanziaria De Agostini,
which handles the Group’s shareholder, legal, fiscal, and financial services, and director of foreign
procedures and shareholder relations at the Istituto Geografico De Agostini S.p.A. He holds a degree in
Business and Economics.
Pier Luigi Celli is a member of Lottomatica’s Board of Directors. He became General Director of RAI
in 1998 and remained in this position until 2001, when he became Executive President of IPSE 2000. From
1983 to 1988 he was the Director of Human Resources and Organisation for RAI, then the Olivetti Group,
and finally ENEL. He began his career as the Director of the Research Department at the Bolzano
Department of Industry and was in charge of five Professional Training Centers. In 1982 he became
Manager of Executive Training and Organisation for ENI, of which he later become Vice Director of
Human Resources and Organisation. He holds a degree in Sociology with honors.
Antonio Tazartes is a member of Lottomatica’s Board of Directors. He has been with Investitori
Associati S.p.A. of Milan since 1993. From 1989 until 1993 he served as the Managing Director of
Bain & Co. Prior to that time, he worked at Laboratoires Gani in Paris and as a part-time Junior Associate
at the Law Offices of Erede Bianchi Gilberti in Milan. He holds a Master’s Degree in Business
Administration, with specialisation in Marketing and Finance, and a Master’s Degree in Law from New
York University.
Emanuela Chiti has been Director of Auditing, Quality and Security of Lottomatica since 1997. From
1980 to 1997 she was employed by Sogei, most recently as a project manager.
241
NOTE 28—SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
(Continued)
Condensed Consolidating Balance Sheets
February 25, 2006
Parent
Company
Assets
Current Assets:
Cash and cash equivalents . . . . . . . . .
Investment securities available-for-sale .
Trade and other receivables, net . . . . .
Due from subsidiaries and affiliates . . .
Refundable performance deposit . . . . .
Inventories . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. $
.
.
.
.
.
.
.
Total Current Assets . . . . . . . . . . . . . . . .
Guarantor Non-Guarantor Eliminating
Subsidiaries Subsidiaries
Entries
Consolidated
— $ 158,150
—
260,725
—
95,894
—
75,758
—
—
—
32,329
—
15,418
—
12,982
$ 77,041
—
87,667
—
8,000
63,906
10,980
34,837
$
— $ 235,191
—
260,725
—
183,561
(75,758)
—
—
8,000
(8,211)
88,024
—
26,398
—
47,819
—
651,256
282,431
(83,969)
849,718
—
1,005,372
—
—
—
—
600,437
474,696
115,981
67,002
19,277
27,272
104,241
—
230,115
34,414
44,935
18,643
(12,133)
(1,480,068)
—
—
—
—
692,545
—
346,096
101,416
64,212
45,915
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $1,005,372 $1,955,921
$714,779
$(1,576,170) $2,099,902
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . .
Due to subsidiaries and affiliates . . . . .
Accrued expenses . . . . . . . . . . . . . . .
Employee compensation . . . . . . . . . .
Advance payments from customers . . .
Deferred revenue and advance billings .
Income taxes payable . . . . . . . . . . . .
Taxes other than income taxes . . . . . .
Current portion of long-term debt . . . .
52,023
—
23,231
24,084
19,758
9,213
66,646
6,409
6,615
$ 41,182
75,758
22,989
7,720
44,010
8,676
452
10,697
2,533
$
—
207,979
214,017
—
—
—
1,005,372
542,206
86,173
93,847
1,025,716
53
20,498
5,515
474,696
—
542,259
—
106,671
—
99,362
(1,500,412) 1,005,372
Total Liabilities and Shareholders’ Equity . . $1,005,372 $1,955,921
$714,779
$(1,576,170) $2,099,902
Systems, Equipment and Other Assets Relating
to Contracts, net . . . . . . . . . . . . . . . . . . . .
Investment in Subsidiaries and Affiliates . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, Plant and Equipment, net . . . . . . . .
Intangible Assets, net . . . . . . . . . . . . . . . . . .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
. $
.
.
.
.
.
.
.
.
Total Current Liabilities . . . . . . . . . . . . . .
Long-Term Debt, less current portion
Other Liabilities . . . . . . . . . . . . . . .
Deferred Income Taxes . . . . . . . . . .
Shareholders’ Equity . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
— $
—
—
—
—
—
—
—
—
C-56
— $
(75,758)
—
—
—
—
—
—
—
(75,758)
93,205
—
46,220
31,804
63,768
17,889
67,098
17,106
9,148
346,238
(Continued)
Condensed Consolidating Income Statements
Fiscal Year Ended February 25, 2006
Parent
Company
Revenues:
Services . . . . . . . . . . . . . . . . . . . . . .
Sales of products . . . . . . . . . . . . . . .
Intercompany sales and fees . . . . . . .
Non-Guarantor
Eliminating
Subsidiaries
Entries
Consolidated
—
—
—
$753,180
63,530
178,547
$369,488
118,608
55,102
—
995,257
543,198
(233,649)
1,304,806
—
—
—
441,692
32,504
146,658
237,418
71,533
13,950
(4,582)
—
(160,608)
674,528
104,037
—
—
620,854
322,901
(165,190)
778,565
Gross profit . . . . . . . . . . . . . . . . . . . .
—
374,403
220,297
(68,459)
526,241
Selling, general & administrative . . . . .
Research and development . . . . . . . . .
—
—
84,953
31,224
50,762
18,645
—
—
135,715
49,869
Operating expenses . . . . . . . . . . . . .
—
116,177
69,407
—
185,584
Operating income . . . . . . . . . . . . . . . .
—
258,226
150,890
—
8,623
2,289
—
2,644
Costs and expenses:
Costs of services . . . . . . . . . . . . . . .
Costs of sales . . . . . . . . . . . . . . . . .
Intercompany cost of sales and fees .
Interest income . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . .
Equity in earnings of consolidated
affiliates . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
$
Guarantor
Subsidiaries
(703)
$
— $1,122,668
—
182,138
(233,649)
—
(68,459)
340,657
—
10,912
—
1,941
211,045
—
—
97,593
(481)
(29,376)
—
(3,860)
(1,417)
(308,638)
—
—
—
(4,341)
(30,793)
211,045
79,003
(3,691)
(308,638)
(22,281)
Income before income taxes . . . . . . . .
211,045
337,229
147,199
(377,097)
318,376
Income taxes . . . . . . . . . . . . . . . . . . .
—
113,646
49,606
(55,921)
107,331
Net income . . . . . . . . . . . . . . . . . . . . .
$211,045
$223,583
$ 97,593
C-58
$(321,176) $ 211,045
(Continued)
Condensed Consolidating Income Statements
Fiscal Year Ended February 26, 2005
Parent
Company
Revenues:
Services . . . . . . . . . . . . . . . . . . . . . .
Sales of products . . . . . . . . . . . . . . .
Intercompany sales and fees . . . . . . .
Non-Guarantor
Eliminating
Subsidiaries
Entries
Consolidated
—
—
—
$718,920
105,848
95,463
$298,763
133,704
63,651
—
920,231
496,118
(159,114)
1,257,235
—
—
—
417,553
56,515
103,009
202,522
101,472
22,008
(3,442)
(13)
(125,017)
616,633
157,974
—
—
577,077
326,002
(128,472)
774,607
Gross profit . . . . . . . . . . . . . . . . . . . .
—
343,154
170,116
(30,642)
482,628
Selling, general & administrative . . . . .
Research and development . . . . . . . . .
—
—
76,904
34,482
40,349
18,077
—
—
117,253
52,559
Operating expenses . . . . . . . . . . . . .
—
111,386
58,426
—
169,812
Operating income . . . . . . . . . . . . . . . .
—
231,768
111,690
—
2,137
2,478
—
2,891
Costs and expenses:
Costs of services . . . . . . . . . . . . . . .
Costs of sales . . . . . . . . . . . . . . . . .
Intercompany cost of sales and fees .
Interest income . . . . . . . . . . . . . . . .
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . . . . . . . . .
Equity in earnings of consolidated
affiliates . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . .
$
Guarantor
Subsidiaries
(79)
$
— $1,017,683
—
239,552
(159,114)
—
(30,642)
312,816
—
4,615
—
2,812
196,394
—
—
74,146
2,571
(17,922)
—
2,785
(1,291)
(270,540)
—
—
—
5,356
(19,213)
196,394
63,823
3,893
(270,540)
(6,430)
Income before income taxes . . . . . . . .
196,394
295,591
115,583
(301,182)
306,386
Income taxes . . . . . . . . . . . . . . . . . . .
—
105,969
41,437
(37,414)
109,992
Net income . . . . . . . . . . . . . . . . . . . . .
$196,394
$189,622
$ 74,146
C-59
$(263,768) $ 196,394
of the Managing Director, for the assessment of the compensation criteria for the senior management of
Lottomatica.
The Board of Auditors
The shareholders of Lottomatica elect a Board of Auditors at the shareholders meetings, as
required by the Italian Civil Code. The Board of Auditors is composed of three regular auditors and two
alternates. At the regular annual meeting of shareholders of Lottomatica (then NewGames S.p.A.) held on
September 21, 2005, the following persons were elected to the Board of Auditors, effective the date of the
merger (December 20, 2005), to serve on such board until the approval of the balance sheet for the fiscal
year ending December 31, 2007.
Name
Date of Birth
Position
Francesco Martinelli . . . . . . . . . . . . . .
October 23, 1942
Chairman of the Board of Auditors
Paolo Andrea Pio Colombo . . . . . . . . .
April 12, 1960
Statutory Auditor
Angelo Gaviani . . . . . . . . . . . . . . . . . . September 7, 1946 Statutory Auditor
Marco Squazzini Viscontini . . . . . . . . .
January 25, 1956
Alternate Auditor
Giulio Gasloli . . . . . . . . . . . . . . . . . . .
January 17, 1962
Alternate Auditor
The address for each of the members of the Board of Auditors is c/o Lottomatica, Rome, Viale del
Campo Boario 56/D.
The Italian Civil Code and the by-laws require that:
• at least one of the regular and one of the alternate auditors be selected from among the registered
members of the certified public accountant registry, which is held by the Ministry of Justice;
• the members of the Board of Auditors are appointed for a period of three years until the date of the
shareholders’ meeting called for the approval of the financial statements relating to the third year of
such appointment. The termination of the auditors’ offices due to the expiration of the their term is
effective only when the new board is appointed; and
• the appointment of each auditor can be revoked only for cause, and any revocation of an
appointment must be approved by a competent court.
Biographies of Statutory Auditors
Francesco Martinelli holds a degree in Business and Economics. He is a certified public accountant and
registered with the Italian Institute of Auditors since 1995 and the Register of Accountants and Tax
Advisors of Rome and Lazio since 1970. He is a freelance certified public accountant assisting companies
operating in various product sectors and specialises in corporate, administrative, and fiscal organisation.
He is the Chairman of the Board of Statutory Auditors and a statutory auditor of various companies,
including several BNL Group companies (BNL Edizioni, BNL Gestioni, etc.), Alitalia Airport S.p.A.
Aviofin S.p.A., Advera S.p.A., Consorzio Pegaso, Retebase 2001 S.p.A., Servizibase 2001 S.p.A., Arianna
2001 S.p.A. (FIT group), several companies belonging to the Lottomatica S.p.A. group (LIS S.p.A.,
LOTTOMATICA SISTEMI, PCC GS S.p.A., Consorzio Lotterie Nazionali, Consorzio Lottomatica Giochi
Sportivi, Carta Lis S.p.A., Videolot Gestione S.p.A.), Banksiel, and Finsiel S.p.A., as well as Ansaldo
Transporti S.p.A., ILVA S.p.A., Serfactoring, Consorzio ICT Lazio, and Banca Impresa Lazio. He is a
member of the Board of Auditors of the ICE—the Italian Trade Commission, a trustee in bankruptcy, an
expert witness at the Civil and Criminal Court of Rome, a member of the Study Commission at the
Ministry of Finance, and chief adjuster for administrative compulsory liquidations. He has also been a
Lecturer on tax law and practice since 1999, and is currently teaching tax practices at the school of Public
Administration at Link Campus University, and also teaches management training courses organised by
the Commune of Cassino.
Paolo Andrea Pio Colombo holds a degree in Business Management from the Università Bocconi of
Milan. He is a licensed auditor and permanent lecturer at the ‘‘Accounting and Financial Statements’’ chair
of the Università Bocconi of Milan. He has operated his own private practice since 1993, and since 2004
245
acts in an ‘‘of counsel’’ capacity for the Law Offices of Tremonti, Vitali, Romagnoli, Piccardi and
Associates. He has been and continues to be a member of the Board of Directors and auditor of several
industrial and financial groups, among the most significant of which are: Gruppo Mediaset, Gruppo
Mediagroup, Versace, Sintesi, Gruppo BPL, Gruppo Credit Suisse Italy, Banca Intesa, ENI, Saipem, Pirelli
Labs, and Montedison.
Angelo Gaviani holds a degree in Business and Economics from the Università Cattolica Sacro Cuore of
Milan. He has been registered with the Board of Accountants and Tax Advisors of Novara since
February 12, 1977. He has worked as an auditor since 1995 and is Chairman of the Board of Statutory
Auditors of several companies, primarily in the insurance and publishing sectors, and he is also a
Consultant to the Court on the management of bankruptcy proceedings.
Marco Sguazzini Viscontini holds a degree in Business Management from the Università Bocconi. He
has been a member of the Society of Accountants and Tax Advisors of Novara since 1985 and an auditor
since 1995. From 1986 to 1998 he was in charge of shareholder services for Gruppo Finanziaria De
Agostini S.p.A. He has been in private practice since January 1, 1999 and maintains an office in Novara, he
is an auditor for several important companies that operate in the industrial, commercial, and financial
sectors, among which are Sotheby Italia S.R.L., Deoflor S.p.A., De Agostini Editore S.p.A., and
Mercantile Leasing S.p.A.
Giulio Gasloli holds a degree in Business and Economics from the Università Cattolica Sacro Cuore in
Milan in 1987. He has been registered with the Board of Accountants and Tax Advisors of Novara since
1991 and became an accounting auditor in 1995. He is a statutory auditor and Chairman of the Board of
statutory auditors of numerous companies and a consultant to the Court of Novara, for which he has
managed several bankruptcy proceedings.
Independent Auditors
The Italian Finance Act requires Italian companies whose shares are listed on an Italian or EU
regulated market to appoint a firm of independent auditors that is mandated to verify under CONSOB’s
supervision (i) during the fiscal year, that the company’s accounting records are correctly kept and
accurately reflect the company’s activities, and (ii) that the financial statements, including the consolidated
financial statements, present fairly the financial position of the company and the results of operations in
accordance with Italian regulations governing financial statements. The independent auditors express their
opinion on the financial statements in a report that may be consulted by the shareholders prior to the
relevant shareholders’ meeting.
On September 21, 2005, Lottomatica’s shareholders’ meeting renewed the engagement of Reconta
Ernst & Young S.p.A. as Lottomatica’s external independent auditors for the period from 2005-2007.
Pursuant to Article 159 of the Italian Finance Act listed companies may appoint the same external auditors
for not more than two consecutive six-year terms.
Service Contracts
Among the members of the Board of Directors and the Board of Statutory Auditors, only Mr. Rosario
Bifulco and Mr. Marco Sala are employees of Lottomatica and so are entitled pursuant to Italian law to
receive an indemnity (trattamento di fine rapporto) at the end of their employment.
In connection with the Acquisition W. Bruce Turner, current President and Chief Executive Officer of
GTECH is proposed as a member of the Board of Directors of Lottomatica in the role of Chief Operating
Officer, and also as the Director General (as such, W. Bruce Turner will have the right to receive severance
pay in accordance with the stipulations of law). W. Bruce Turner will also keep his current position with
GTECH.
Each of Marc A. Crisafulli, Walter G. DeSocio, Timothy B. Nyman, Jaymin B. Patel and Donald R.
Sweitzer have entered into a change of control agreement with GTECH providing for three-year
employment terms for such covered executives and each of William M. Pieri and Robert I. Plourde have
246
entered into a change of control agreement with GTECH providing for two-year employment terms for
such covered executives. Upon certain termination events of any such executives during the applicable
three-year or two-year period following the merger, such executive will be entitled to certain payments
pursuant to the terms of such agreements.
New Employment Agreements—GTECH Officers
Prior to the closing of the Acquisition, certain of GTECH’s existing executive officers (the ‘‘Covered
Officers’’), will enter into new employment agreements with Lottomatica or GTECH that will take effect
after completion of the proposed Merger. As of the date of this Offering Circular, Messrs. Turner, Patel,
and DeSocio, Mr. Donald Sweitzer, GTECH’s Senior Vice President, Global Business Development and
Public Affairs, and Ms. Cornelia H. Laverty O’Connor, GTECH’s Senior Vice President and Chief
Marketing Officer, have entered into such agreements. In the case of Mr. Turner, the new employment
agreement will replace his existing employment agreement. In the case of the other Covered Officers (with
the exception of Ms. Laverty O’Connor, who does not currently have an employment agreement or change
in control agreement with GTECH), their new employment agreements will replace their existing
severance agreements, change in control agreements, and restrictive (non-competition) agreements with
GTECH.
New Employment Agreement with W. Bruce Turner. The new employment agreement between
Mr. Turner and Lottomatica will have a five-year term that will commence upon completion of the
proposed Merger. Pursuant to the new employment agreement, Mr. Turner will serve as Chief Executive
Officer of Lottomatica and GTECH and, if elected, will serve as Managing Director of Lottomatica. His
annual base salary pursuant to the agreement will be U.S.$850,000 (which is a U.S.$50,000 increase from
his current annual base salary), and he will be entitled to a level of benefits during the term of the
agreement that is substantially similar to the level of benefits provided generally to other senior executives
of Lottomatica, and executive benefits substantially equivalent to the benefits that Mr. Turner is currently
entitled to receive. During the term, Mr. Turner will be eligible for a performance bonus ranging from 0%
to 200% of his annual base salary, with a target bonus of 100% of his base salary, which is equivalent to his
bonus range and target bonus pursuant to his current employment agreement.
Pursuant to the new employment agreement, in the event of a termination of Mr. Turner’s
employment by Lottomatica for any reason other than cause or a resignation by Mr. Turner for good
reason (as such terms are defined in Mr. Turner’s new agreement) during the 18 month period following a
change in control (which includes the proposed Merger), he will be entitled to substantially the same
payments and benefits set forth in his current employment agreement.
Mr. Turner’s current employment agreement provides that if his employment is terminated by
GTECH for any reason other than cause, or in the event that he resigns for good reason (as such terms are
defined in his employment agreement), within 18 months after completion of the proposed Merger,
GTECH will pay Mr. Turner a lump-sum cash payment in an amount equal to 2.99 times the sum of
(i) Mr. Turner’s then-current annual base salary plus (ii) the average performance bonus paid or payable to
Mr. Turner for the three most recent full fiscal years of GTECH plus (iii) the maximum amount allowable
under GTECH’s Executive Perquisite Program. In addition, GTECH will pay Mr. Turner any prorated
performance bonus up to the date of such termination calculated by reference to Mr. Turner’s target
performance bonus, as determined by GTECH’s Compensation Committee for the year of termination,
and any other amounts accrued through the date of termination. In addition, Mr. Turner (together with his
beneficiaries and dependents) will become fully vested in, and will continue for up to seven years (and until
Mr. Turner reaches age 65 if he qualifies under GTECH’s Retirement Plan) to participate fully (at no
additional cost to Mr. Turner) in all life insurance, accident and health and other welfare plans maintained
or sponsored by GTECH prior to termination of his employment on terms at least as favourable to Mr.
Turner as those in effect prior to termination. In such circumstances, Mr. Turner will also become fully
vested in GTECH’s 401(k) plan and all supplemental retirement plans, and GTECH will be required to pay
Mr. Turner an amount equal to the sum of all benefits he has accrued under GTECH’s supplemental
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retirement plans, plus 2.99 times the average benefit accrued and/or GTECH contributions made to
GTECH’s 401(k) plan and supplemental retirement plans over the last three fiscal years prior to
termination.
Mr. Turner’s employment agreement further provides that in the event that any payments that
Mr. Turner receives from GTECH become subject to the excise tax on golden parachute payments,
Mr. Turner will be entitled to receive a gross-up payment that will be in an amount sufficient to put him in
the same after-tax position that he would have been in had no excise tax been imposed on the payments.
In the event of a qualifying termination of Mr. Turner’s employment, other than during the 18-month
period following a change in control, Mr. Turner will be entitled to receive: (i) an amount equal to
18 months of his most recent annual base salary, payable in installments over 18 months, (ii) a lump-sum
cash payment in an amount equal to 1.5 times the average performance bonus paid or payable to
Mr. Turner with respect to the three most recently completed fiscal years of employment and (iii) a
prorated performance bonus, if any, payable with respect to the fiscal year of termination, payable at the
same time as other executives receive such bonuses and based on the executive’s actual performance
during the year. In addition, Mr. Turner will continue to receive certain life insurance, perquisite and tax
preparation benefits for 18 months following termination, and will continue to receive certain medical
benefits for the remainder of the term of the employment agreement, plus an additional period of up to
five and a half years thereafter (and until Mr. Turner reaches age 65, if he qualifies under Lottomatica’s
Retirement Plan). In the event of a qualifying termination, Mr. Turner will fully vest in all benefits accrued
under any employee benefit plans, other than qualified retirement plans, and to the extent that Mr. Turner
is not fully vested in all qualified retirement plans, he will receive a payment equal to any unvested portion
of his accounts in such retirement plans. Furthermore, any unvested equity awards granted pursuant to the
new employment agreement (as described below) then held by Mr. Turner will become fully vested, and
Mr. Turner will be entitled to exercise any stock options that he holds until the earlier of 18 months from
the date of termination of his employment or the date such stock options expire.
In the event of a termination of Mr. Turner’s employment as a result of retirement (which cannot
occur until the fifth anniversary of the proposed Merger and until the sum of his age and years of service
with Lottomatica and GTECH is at least 65), Mr. Turner will be entitled to continued medical benefits
until age 65. In addition, any vested stock options that he holds will remain exercisable until they expire,
and he will be entitled to accelerated vesting of some or all of the unvested stock options and restricted
stock units that were granted pursuant to his employment agreement. The percentage of unvested awards
that accelerates will depend on his age and years of service at the time of retirement. The new employment
agreement provides that Lottomatica will enter into a tax equalisation agreement with Mr. Turner to make
Mr. Turner whole to the extent that his total tax liability under both United States and Italian tax laws is in
excess of the total tax liability if he was only subject to tax under United States laws.
New Employment Agreements with Other Executive Officers. The new employment agreements with
Messrs. Patel, DeSocio, and Ms. Laverty O’Connor will have a five-year term that will commence upon
completion of the proposed Merger. The new employment agreement with Mr. Sweitzer will have a
two-year term, subject to three one-year extensions at Mr. Sweitzer’s option, that will commence upon
completion of the proposed Merger. Pursuant to the new employment agreements, Mr. Patel will serve as
Chief Financial Officer of Lottomatica and GTECH, Mr. DeSocio will serve as Chief Administrative
Officer of Lottomatica and GTECH and the other Covered Officers will continue to serve in their current
capacities with GTECH following completion of the proposed Merger. The annual base salaries of the
Covered Officers will remain at the current levels (except for Mr. DeSocio, whose annual base salary will
increase by U.S.$25,000, and Mr. Patel, whose annual base salary will increase by U.S.$35,000), and they
will be entitled to a level of benefits during the term of their new employment agreements that are
substantially similar to the level of benefits provided generally to other senior executives of Lottomatica,
and executive perquisites substantially equivalent to the perquisites that the executives are currently
entitled to receive. Each Covered Officer’s target bonus will remain at the same percentage of annual base
248
In August 2005, GTECH received an order from the California lottery authority for a variety of lottery
products, including 550 additional Altura terminals, 700 Altura CVT terminals, 1,000 Instant Ticket
Vending Machines and other self service lottery solutions.
During calendar 2005, the Ohio lottery authority, Dansk Tipstjeneste (GTECH’s lottery customer in
Denmark), and Supreme Ventures Limited (GTECH’s lottery customer in Jamaica), each exercised
options to extend the terms of their respective online contracts with GTECH. In addition, in May 2005,
GTECH signed a new one-year contract with Caixa Economica Federal (‘‘CEF’’), the administrator of the
National Lottery in Brazil, which provides for GTECH to continue to operate the existing lottery and
financial transaction processing systems for CEF through May 14, 2006, or such later date as CEF may
elect.
During calendar 2005, GTECH received several awards, or extensions of awards, to provide ITVMs in
addition to orders of ITVMs from the North Carolina and California lottery authorities in the context of
the larger contracts as awards described above. In June 2005, GTECH entered into a product sale
agreement, following a competitive procurement, with the operator of the French National Lottery,
LaFrancaise Des Jeux (‘‘FDJ’’), to provide FDJ not less than 575 ITVMs and repair services. In June 2005,
GTECH entered into a two-year extension with the Ohio lottery commission for the lease of ITVMs.
Other Products And Services
During calendar 2005, GTECH entered into a number of agreements, and announced a number of
other developments, respecting products and services outside of its traditional online lottery product
offerings.
Video Lottery And Gaming. In February 2005, AB Svenska Spel, the Swedish lottery authority, agreed
to purchase from Spielo Manufacturing, Inc. (‘‘Spielo’’) 2,000 next generation wide area video lottery
terminals which were deployed commencing in September 2005. In September 2005, following a
competitive procurement, GTECH entered into an agreement with the Pennsylvania Department of
Revenue to provide a gaming central control system to monitor and control up to 61,000 gaming machines
which are to be installed at approximately 14 venues. In December 2005, following a competitive
procurement, GTECH entered into an agreement to provide a video gaming monitoring system and site
controllers for the Louisiana Department of Public Safety and Corrections’ video gaming program.
New Product Offerings And Developments. In June 2005, GTECH entered into a joint venture
agreement with Viekkaus Oy, the operator of the Finnish national lottery, to develop and market
innovative new games and solutions for the lottery and gaming industries. The primary focus of this joint
venture, in which GTECH will hold an 81% equity stake, is the development of government-sponsored
games and solutions (with an emphasis on sports-betting games and solutions) over interactive channels
such as Internet, mobile telephony and interactive television.
In November 2005, GTECH announced the successful integration of its Lottery Inside technology into
the Nucleus Point of Sale (‘‘POS’’) Platform offered by Dresser Wayne, a business unit of Dresser Inc. and
a pioneer in the retail fueling industry. GTECH’s Lottery Inside technology enables the sale of lottery
tickets through PC-based POS devices used by retailers, thereby obviating the need for retailers to
maintain dedicated lottery terminals.
GTECH reported several new product offerings and other developments during calendar 2005
respecting its video lottery and gaming businesses.
In February 2005, GTECH announced the development of HotTrax, an exciting new lottery monitor
game that creates the illusion of an auto race that is taking place in three dimensions.
In May 2005, GTECH and Harrah’s Operating Company, Inc., a subsidiary of Harrah’s
Entertainment, Inc. (‘‘Harrah’s’’), entered into a strategic relationship whereby GTECH agrees to supply
D-5
retirement plans, he or she will receive a payment equal to any unvested portion of his or her accounts in
such retirement plans. Furthermore, any unvested retention equity awards (or, in the case of Mr. Patel, any
unvested equity awards) granted pursuant to the new employment agreement (as described below) then
held by the executive will become fully vested, and the executive will be entitled to exercise any vested
stock options that he or she holds until the earlier of 18 months from the date of termination of
employment or the date such stock options expire.
In the event of a termination of an executive’s employment as a result of retirement (which cannot
occur until the fifth anniversary of the proposed Merger and until the sum of his or her age and years of
service with Lottomatica and GTECH is at least 65), any vested stock options that the executive holds will
remain exercisable until they expire, and the executive will be entitled to accelerated vesting of some or all
of the unvested stock restricted stock units that were granted pursuant to the employment agreement. The
percentage of unvested awards that accelerates will depend on the executive’s age and years of service at
the time of retirement.
The new employment agreements provide that Lottomatica will enter into a tax equalisation
agreement with the applicable executive to make the executive whole to the extent that his or her total tax
liability under both United States and Italian tax laws is in excess of the total tax liability if the executive
was only subject to tax under United States laws.
Mr. Sweitzer’s new employment agreement will also provide that upon expiration of employment,
GTECH will offer to enter into a consulting arrangement with Mr. Sweitzer.
Management Equity Reinvestment. The new employment agreements with each of the Covered
Officers (other than Ms. Laverty O’Conner and Mr. Sweitzer) will also provide that each such officer
currently holding GTECH shares will invest at least 50% of his net after-tax payments received as Merger
consideration or option proceeds to purchase newly issued shares of Lottomatica stock after completion of
the proposed Merger, at the Rights Offering subscription price. Pursuant to the terms of the new
employment agreements, the shares will not be transferable until the earlier of the three-year anniversary
of the effective date of the proposed Merger or the termination of the applicable executive’s employment
with Lottomatica and/or GTECH. Mr. Sweitzers agreement provides he will invest an amount, not to
exceed U.S.$1 million, from his net after-tax payments received as Merger consideration or option
proceeds to purchase newly issued Shares of Lottomatica stock after completion of the proposed Merger,
at the Rights Offering subscription price.
Equity Based Grants. The new employment agreements will provide that the Covered Officers will be
eligible for annual grants of stock options and other equity-based awards under Lottomatica’s long-term
incentive plans. Of such future equity grants, at least 35% will consist of restricted stock units that will be
settled in fully vested shares of Lottomatica stock upon the achievement of target performance goals. In
addition, within 60 days following completion of the proposed Merger, each Covered Officer (other than
Ms. Laverty O’Conner) will be entitled to a grant of equity-based awards set forth in the table below. The
value of such awards on the grant date will be split 65% stock options (the value of which will be
determined on a Black-Scholes basis) and 35% restricted stock units (the value of which will be
determined based on the price of Lottomatica’s ordinary shares on the grant date). The stock options will
vest in a manner consistent with stock options granted to other senior executives of Lottomatica. The
restricted stock units will vest upon the achievement of target performance goals in a manner consistent
with the equity compensation policies for other senior executives of Lottomatica.
The new employment agreements provide that Lottomatica may substitute equivalent awards payable
in cash for any stock options or restricted stock units granted pursuant to the employment agreements.
250
The value and number of shares subject to each executive officer’s awards will be as provided in the
following table:
Value
(U.S. dollars)
Estimated
Number of Shares
Mr. Turner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
RSUs
Total
3,900,000
2,100,000
6,000,000
368,620
47,781
416,401
Mr. DeSocio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
RSUs
Total
796,250
428,750
1,225,000
75,259
9,755
85,014
Mr. Patel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
RSUs
Total
1,365,000
735,000
2,100,000
129,017
16,723
145,740
Mr. Sweitzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options
731,250
69,116
RSUs
393,750
8,959
Total
1,125,000
78,075
Following completion of the proposed Merger, and pursuant to the terms of his or her new
employment agreement, each Covered Officer will also be entitled to a retention equity award of restricted
stock units with respect to a number of Lottomatica ordinary shares, payable in fully vested shares of
Lottomatica stock over a five-year period. The awards will vest and be payable in five annual installments,
on each of the first five anniversaries of the completion of the proposed Merger, provided that such officer
is still employed by Lottomatica on the relevant vesting dates. The Covered Officers will be entitled to
restricted stock units with respect to the following numbers of shares that have the following values (based
on a price of Lottomatica’s stock equal to U.S.$43.95 per share): Turner (232,500, U.S.$10,218,375), Patel
(82,600, U.S.$3,630,270), DeSocio (34,500, U.S.$1,516,275), and Laverty O’Connor (12,500, U.S.$549,375).
Mr Sweitzer will be entitled to 16,000 restricted stock units with a value of U.S.$703,200 for his two year
employment term, with an additional award of 8,000 restricted stock units with a value of U.S.$351,600 for
each year his employment term is extended. In the event of a subsequent change in control following the
proposed Merger, any Lottomatica equity awards then held by such officer that have not vested will
become fully vested and, in the case of stock options, immediately exercisable.
Arrangements with Other Executive Officers. Prior to completion of the proposed Merger,
Messrs. Pieri and Plourde are expected to enter into amended severance agreements and change in control
agreements, in substitution for their existing severance agreements and change in control agreements,
containing provisions substantially similar to the terms and conditions summarised above with respect to
such matters for the Covered Officers. In consideration of such amended severance agreements and
change of control agreements, Messrs. Pieri and Plourde will each invest 25% of his net after-tax payments
received as Merger consideration to purchase newly issued ordinary shares of Lottomatica after
completion of the proposed Merger, at the Rights Offering subscription price. Both Messrs. Pieri and
Plourde are also expected to receive a grant of equity-based awards that have values of U.S.$175,000 and
U.S.$350,000, respectively. In addition, Messrs. Pieri and Plourde are expected to receive a grant of
retention equity awards of restricted stock units on the same terms and conditions as summarised above
with respect to the Covered Officers that have a value of U.S.$472,463 and U.S.$560,363, respectively.
Interests of Members of the Board of Directors, Board of Statutory Auditors and Senior Management
in Lottomatica’s Share Capital
To the best of the knowledge of Lottomatica, as of the date of this Offering Circular, none of the
directors, statutory auditors or senior managers of Lottomatica own, directly or indirectly any shares of
Lottomatica, except for Ms. Emanuela Chiti, Chief of Internal Audits of Lottomatica, who holds 15,808
251
shares, Mr. Severino Antonio Salvemini, a member of the Board of Directors, who holds 2,000 shares,
Mr. Marco Sala, who holds 50 shares, Mr. Rosario Bifulco, who holds 276,000 shares, Mr. Antonio Belloni,
who holds 240,667 shares, Mr. Mario Bondone, who holds 460 shares and Mr. Fabrizio Feliziani, Head of
Lotto Business Unit, who holds 6,092 shares.
Conflict of Interests
To the best of the knowledge of Lottomatica on the date of this Offering Circular, there are no
potential private interests or other obligations of the members of the board of directors and the board of
auditors that may be considered to be in conflict with the obligations of Lottomatica.
potential private interests or other obligations of the principal directors of Lottomatica that may be
considered to be in conflict with the obligations of Lottomatica.
agreements among shareholders, clients, suppliers or others in terms of the choice of the members of the
corporate bodies or the principal directors and agreements relating to transfer of the shares of Lottomatica
held by the members of the corporate bodies and/or the principal directors.
New Borsa Italiana S.p.A. Corporate Governance Code
Lottomatica is presently verifying its policies and procedures for compliance with the new Corporate
Governance for Italian listed companies, which was announced in March 2006. Based on its initial review,
Lottomatica believes that it already is substantially in conformity with a large part of the new code of
conduct, subject to certain measures which it intends to implement by the end of the 2006 fiscal year (for
example, in relation to the composition of the Board of Directors, the nomination procedure for
administrators and auditors, and certain matters relating to internal control). Adoption of the code is
voluntary; however a listed company will be required to disclose whether it is has adopted the code, in
whole or in part, beginning in 2007.
In particular, with reference to the composition of the Board of Directors, Lottomatica intends to
consider the new and more precise notions of non-executive and independent directors set out in the new
code of conduct.
With reference to the procedure of the nomination of directors and auditors, while continuing to
abide by certain requirements introduced in the Law No. 262 of December 28, 2005 (the so-called ‘‘Law for
the safeguard of savings’’) in the matter of list voting for the nomination of directors, of the rights of the
minority to elect at least one director and the president of the board of statutory auditors, and of secret
voting, Lottomatica intends to increase the period during which an overview of the personal and
professional characteristics of the candidates proposed by the shareholders, as well as of the assignments
held by the same candidates, will be deposited at the company headquarters, from 10 to 15 days prior to
the shareholders’ meeting. This to allow the shareholders to knowingly exercise their right to vote,
especially where represented at the assembly by proxy.
Finally, with regards to the internal control system, Lottomatica intends to continue to seek to
improve the coordination between the various levels of control and the interested company functions,
especially following the purchase of GTECH, so as to avoid overlaps and voids, and to thereby ensure
maximum control efficiency.
Compensation of Directors, Statutory Auditors and Senior Management
For the year ended December 31, 2005, the aggregate compensation, exclusive of bonuses, paid by
Lottomatica to members of the Board of Directors and the Board of Statutory Auditors was approximately
A799,000 and A202,000, respectively. The aggregate compensation paid by Lottomatica to members of its
senior management was approximately A14,523,000.
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2.3
Summary of significant accounting policies
Foreign currency translation
The consolidated financial statements are presented in United States dollars, which is the Company’s
functional and presentation currency. The functional currency for the majority of our foreign subsidiaries
is the applicable local currency and items included in the financial statements of each entity are measured
using that functional currency. For those subsidiaries, we translate assets and liabilities at exchange rates in
effect at the balance sheet date, and income and expense accounts at weighted average exchange rates. The
resulting foreign currency translation adjustments are recorded in Other Reserves in our Consolidated
Balance Sheet. Gains or losses resulting from foreign currency transactions are recorded in our
Consolidated Income Statement. In accordance with IFRS 1, the cumulative translation differences for all
foreign operations were deemed to be zero at the date of transition to IFRS (January 2, 2005).
For those foreign subsidiaries operating in a highly inflationary economy or whose functional currency
is the United States dollar, nonmonetary assets and liabilities are translated at historical rates and
monetary assets and liabilities are translated at current rates. The resulting foreign currency translation
adjustments are recorded in our Consolidated Income Statement.
Systems, equipment and other assets related to contracts, net
Systems, equipment and other assets related to contracts are stated on the basis of cost. The cost is
depreciated over the estimated useful life of the assets using the straight-line method depending on the
type of cost. Cost is comprised of two categories:
• hard costs (for example: terminals, mainframe computers and communications equipment) and;
• soft costs (for example: software development).
Hard costs are depreciated using the straight line method over the base term of the contract plus
extension years provided for in the contract that are deemed probable, but not to exceed 10 years. Soft
costs are depreciated using the straight line method over the base term of the contract, but not to exceed
10 years.
The carrying values of systems, equipment and other assets related to contracts are reviewed for
impairment when events or changes in circumstances indicate that the carrying value may not be
recoverable.
Property, plant and equipment, net
Property, plant and equipment is stated on the basis of cost. The cost is depreciated over the
estimated useful life of the assets using the straight-line method. The estimated useful lives are generally
10 to 30 years for buildings and five to 10 years for furniture and equipment.
The carrying values of property, plant and equipment are reviewed for impairment when events or
changes in circumstances indicate that the carrying value may not be recoverable.
Borrowing costs
Pursuant to International Accounting Standards (‘‘IAS’’) 23, the Company capitalizes borrowing costs.
Borrowing costs capitalized during the period January 2, 2005 through December 31, 2005 were
$0.3 million.
D-14
2.3
Summary of significant accounting policies (Continued)
Goodwill and other intangible assets
Goodwill acquired in a business combination is initially measured at cost being the excess of the cost
of the business combination over the Company’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if
events or changes in circumstances indicate that the carrying value may be impaired.
For the purpose of impairment testing, goodwill acquired in a business combination is, from the
acquisition date, allocated to each of the Company’s cash-generating units, or groups of cash-generating
units, that are expected to benefit from the synergies of the combination, irrespective of whether other
assets or liabilities of the Company are assigned to those units or groups of units. Each unit or group of
units to which the goodwill is so allocated:
• Represents the lowest level within the Company at which the goodwill is monitored for internal
management purposes; and
• Is not larger than a segment based on either the Company’s primary or the Company’s secondary
reporting format determined in accordance with IAS 14 Segment Reporting
Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of
cash-generating units), to which the goodwill relates. Where the recoverable amount of the
cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss
is recognized. Where goodwill forms part of a cash-generating unit (group of cash-generating units) and
part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of
is included in the carrying amount of the operation when determining the gain or loss on disposal of the
operation. Goodwill disposed of in this circumstance is measured based on the relative values of the
operation disposed of and the portion of the cash-generating unit retained.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible
assets acquired in a business combination is fair value as of the date of acquisition. Following initial
recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated
impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not
capitalized and any expenditure is charged against profits in the year in which the expenditure is incurred.
The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with
finite lives are amortized over the useful economic life and assessed for impairment whenever there is an
indication that the intangible asset may be impaired. The amortization period and the amortization
method for an intangible asset with a finite useful life are reviewed at least at each year-end. Changes in
the expected useful life or the expected pattern of consumption of future economic benefits embodied in
the asset is accounted for by changing the amortization period or method, as appropriate, and treated as
changes in accounting estimates. The amortization expense on intangible assets with finite lives is
recognized in the income statement within the caption ‘‘Depreciation, Amortization and Write-downs’’.
Intangible assets with indefinite useful lives are tested for impairment annually either individually or
at the cash-generating unit level. Such intangibles are not amortized. The useful life of an intangible asset
with an indefinite life is reviewed annually to determine whether the indefinite life assessment continues to
D-15
Considering that the 2006 Stock Attribution Plan to Employees of Lottomatica and/or its subsidiaries
is related to the Acquisition, its implementation is subordinated to the completion of the Acquisition in
accordance with the terms and conditions of the Merger Agreement.
Description of Possible Agreements for Participation in the Capital of Lottomatica on the part of the
Employees
On the date of this Offering Circular there are no agreements for the participation in the capital of
Lottomatica on the part of the employees.
255
PRINCIPAL SHAREHOLDERS
As of April 13, 2006, De Agostini owns, directly and indirectly, approximately 56.3% of Lottomatica’s
capital stock.
De Agostini is a company owned by several members of the Drago and Boroli families. None of the
members of these families holds more than 9% of De Agostini’s capital stock and among these members,
there is no shareholders’ agreement in place, within the meaning of the provisions of Article 122 of the
Italian Finance Act. As such, there is no one person who controls De Agostini pursuant to Article 93 of the
Italian Finance Act.
The De Agostini Group is a multinational Italian company that commenced operations in the
publishing industry. As of today, its revenues are, for the most part, generated by insurance-type activities.
In 2001, it celebrated 100 years of activity and today it is a holding company with equity investments in 4
industrial sectors and in the financial field, coordinating its various activities through the following
sub-holding companies:
• De Agostini Editore: this company operates in 30 countries and publishes in 13 languages. It is
organised into business areas, depending on the type of activity: Collectible, Direct Marketing,
General Cultural Great Works, Books, Schools and Maps, Theme Portals, Magazines.
• De Agostini Communications: this company operates in the production, distribution and
broadcasting of contents for television, cinema and all other media. It holds a significant presence in
the television and radio industries in Spain through the broadcaster Antena 3 de Television S.A.
• Lottomatica: this company operates, as shown in previous section IV, in the gaming industry (Lotto,
Totocalcio, Scratch & Win, etc.) and in the area of automated services for citizens and companies
(Motor Vehicle license duty payment, RAI TV license fee, land and mobile phone reloading,
sporting and event tickets, etc.)
• Toro Assicurazioni S.p.A.: this company operates mainly in property and casualty insurance and is
also present in Life insurance. Toro is also the parent company to Nuova Tirrena, Augusta
Assicurazioni (with the subsidiary Augusta Vita) and Toro Targa Assicurazioni.
• De Agostini Invest: this company manages a significant portfolio of equity investments Private
Equity funds aimed at industries with high growth potential and innovation.
Based on information received from filings made with the CONSOB, as of April 13, 2006, the
shareholders that hold, directly or indirectly, shares with voting rights exceeding 2% of the ordinary share
capital of Lottomatica, are:
Shareholders
De Agostini S.p.A. . . . . . . . .
Nuova Tirrena S.p.A. . . . . . .
FMR Corp. . . . . . . . . . . . . .
Fidelity International Limited
BNP PARIBAS S.A. . . . . . . .
BPU Pramerica SGR S.p.A. .
Mediobanca S.p.A. . . . . . . . .
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No. of Shares
Percentages
of the
Capital of
Lottomatica
49,019,647
2,656,618
2,629,955
2,987,441
2,058,650
1,892,742
1,837,970
53.365%
2.892%
2.863%
3.252%
2.241%
2.061%
2.001%
De Agostini has agreed, subject to certain conditions, to exercise its full, direct and indirect, pro rata
share of the rights offering (A0.8 billion).
256
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business, Lottomatica carries out transactions with related parties in
accordance with established market practice and specific legal provisions. These transactions allow
advantages from the use of common services and capacities, from synergies with Lottomatica group of
companies and from the application of unitary polices in the financial field. In particular, the transactions
concern the provision of management, financial, and business services, such as the managemnet of
accounting, the issue of loans and the provision of professional and administrative services (personnel
management services, accounting, software systems, planning, the call center, the leasing of spaces for the
use as offices with the provision of additional services, etc.).
All the transactions with related parties, including transactions within the Lottomatica group of
companies carried out by Lottomatica during the course of the fiscal years 2003, 2004, and 2005, and in the
course of the fiscal year 2006 up to the date of this Offering Circular, fall under ordinary operations, and
they are regulated by market conditions or on the basis of specific stipulations of law; no atypical and/or
unusual activities were conducted in the same period.
The following is an indication of the transactions conducted with related parties over the course of the
last three-year period:
• the transfer of RTI Videolot shares from Triplet S.p.A. (Lottomatica) to New Lottomatica executed
on May 12, 2005. Pursuant to the relevant agreement New Lottomatica acquired 58,800 shares of
RTI Videolot for a consideration of A14,700;
• the transfer of Triplet S.p.A. (Lottomatica) shares from New Lottomatica to De Agostini executed
on May 12, 2005. Pursuant to the relevant agreement De Agostini acquired 120,000 shares of
Lottomatica for a consideration of A265,222;
• the contribution in kind of FinEuroGames S.p.A. shares into NewGames S.p.A. executed by
De Agostini in July 18, 2005: this contribution constitutes a transaction between related parties
because De Agostini held the entire share capital of NewGames S.p.A. on the date of the
transaction. For this reason, the total share base which was the subject of the contribution was
valued by an expert named in accordance with article 2343 of the civil code;
• the merger of New Lottomatica and FinEuroGames S.p.A. into NewGames S.p.A. executed in
December 14, 2005 constitutes a transaction between related parties, in light of the fact that
NewGames S.p.A. held the entire share capital of FinEuroGames S.p.A., which controlled the
rights of New Lottomatica. Even in light of these circumstances—although there do not seem to be
any potential conflicts of interest in the present case between the parties participating in the
merger—the boards of directors of the companies participating in the merger have both granted the
MCC S.p.A. the assignment of supporting them in respect of the determinations of their
competence in the exchange relations and to provide an opinion on the congruity from a financial
point of view, the so-called ‘‘fairness opinion’’; and
• the contribution in kind of the Video lottery branch of business of Lottomatica to RTI Videolot
executed in December 2005. The Video lottery branch of business, previously the object of a
business rental contract between Lottomatica and RTI Videolot, was contributed by Lottomatica
into RTI Videolot in December 2005.
The valuation and the ‘‘fairness opinion’’ indicated above were made public during the quotation
procedure for the Lottomatica at the same time as the merger.
For the purposes of the description of the guarantee of Lottomatica must issue to Gold Acquisition
Corp., and to the benefit of the banks for the issue of the Senior Credit Facilities, see ‘‘Description of
Certain Indebtedness—Senior Credit Facilities’’.
257
In order to guarantee that the transactions with related parties occur in accordance with formal and
substantial fairness principles, the Board of Directors of Lottomatica has adopted, on March 4, 2003, in the
area of projects intended to ensure compliance with the Code of Conduct, an ‘‘Internal regulation
concerning the corporate transactions within the group and with other related parties’’.
In short, such regulation provides:
(a) a definition of transactions within the group, of transactions with other related parties, of unusual
or atypical transactions, and of transactions to be concluded at standard conditions, in accordance
with what was provided by the CONSOB ruling on such point;
(b) the determination of the principles related to the resolutions on transactions within the group
and with other related parties, which provide, in short, a reservation to the exclusive competence
of the Board of Directors to resolve on the amount limits for the possible attribution to one or
more directors of the decision and the execution of the transactions of the previous point, with
the specific duty to provide information to the Board of Directors in the next meeting;
(c) the provision that the board will adopt the relevant resolution on the point after valuation and
based on proper information related to the nature of the connection, the method of executing the
transaction, the conditions, including economic conditions for its execution, the valuation
procedure followed, the justification for the transaction, the interests involved, and the possible
risks for Lottomatica;
(d) the provision that the Board use independent experts, where the nature, the value, or other
characteristics of the transactions so require, so that they express a non-binding opinion,
according to the specific case, on the economic conditions of the transaction, its legitimacy,
and/or on its technical aspects;
(e) the provision of an information procedure for the quarterly collection of the aggregate data
related to transactions within the group and transactions with other related parties; and
(f) the provision of an information procedure, in application of article 150 of the Italian Finance Act,
for the quarterly communication to the Board of Auditors on the part of the Board of Directors
on the transactions within the group and transactions with other related parties.
In addition, in connection with the Acquisition, De Agostini has entered into the following agreement:
The De Agostini Undertakings
Concurrently with the Merger Agreement, on January 10, 2006, De Agostini entered into an
agreement with GTECH pursuant to which De Agostini has agreed, subject to certain conditions, to vote
in favour of the Rights Offering in connection with the completion of the merger and to exercise its full,
direct and indirect, pro rata share of such Rights Offering (thereby assuring that the issue will be approved
by such shareholders). De Agostini also will enter into a similar undertaking for the benefit of underwriters
of the Rights Offering, and of the Company subject to certain conditions.
Guarantee
In connection with the Acquisition, Lottomatica is committed to issue a guarantee in favor of
Acquisition Subsidiary and to the benefit of the banks in connection with the Senior Credit Facilities.
For additional information on transactions between Lottomatica and related parties please see
note 34 to Lottomatica’s audited consolidated financial statements for the year ended December 31, 2005
and note 33 to Lottomatica’s unaudited interim consolidated financial statements for the three-month
period ended March 31, 2006.
258
Purchase of Securities by De Agostini’s Subsidiary
Toro Assicurazioni S.p.A., a subsidiary owned 65.5% by De Agostini, has agreed to purchase a total of
approximately A20.0 million of Securities, in this Offering (equal in the aggregate to approximately 2.6% of
the Securities offered). Such subsidiary of De Agostini will be entitled to participate in and vote at
meetings of Securityholders in proportion to the amount of Securities it will own.
259
DESCRIPTION OF CERTAIN INDEBTEDNESS
Senior Credit Facilities
In connection with the Acquisition, Acquisition Subsidiary (‘‘Borrower’’), an indirect subsidiary of
Lottomatica (in such capacity, the ‘‘Parent’’) that will be merged with and into GTECH, has entered into
the Senior Credit Facilities Agreement, on terms substantially as described below, with Credit Suisse
International, Credit Suisse, London Branch and Goldman Sachs Credit Partners L.P., and certain other
lenders as original lenders, Bank of America, N.A., as agent, and certain other parties thereto. The
obligations of the Borrower under the Senior Credit Facilities Agreement rank at least pari passu with the
claims of all its other unsecured and unsubordinated creditors, except for obligations mandatorily
preferred by law applying to companies generally. The obligations of the Borrower are guaranteed on a
senior, unsecured basis as described below. The Senior Credit Facilities mature 6 years from the closing of
the Acquisition and may be pre-paid in minimum amounts at any time prior to maturity without premium
or penalty, subject to an indemnity for break costs.
Term Facility, Revolving Facility and Guarantee Facility
The Senior Credit Facilities consist of:
• a maximum of U.S.$2.26 billion senior term loan facilities (the ‘‘Term Facilities’’);
• a maximum of U.S.$250 million senior revolving credit facility (the ‘‘Revolving Facility’’); and
• a maximum of U.S.$250 million senior guarantee facility (the ‘‘Guarantee Facility’’).
Pursuant to the Term Facilities, lenders have agreed to advance up to U.S.$1.710 billion in Term
Facility A loans and up to U.S.$550 million in Term Facility B loans. Term Facility A loans are only
available to be applied to payment of the purchase price for the GTECH shares, to pay the costs of the
Acquisition and to refinance certain existing indebtedness of GTECH and its subsidiaries. Term Facility B
loans are only available to be applied towards the refinancing of the GTECH senior notes and to pay the
costs associated with the redemption thereof.
Pursuant to the Revolving Facility, lenders have agreed to advance revolving facility loans available in
U.S. dollars, euros, Sterling or certain other approved currencies in an amount of up to the equivalent of
U.S.$250 million to finance working capital requirements and for general corporate purposes of the
Parent, Borrower and their respective subsidiaries, excluding acquisitions/mergers or prepayment of the
Term Facilities. The Revolving Facility may not be utilised unless Term Facility A has been utilised in full
and/or cancelled.
The lenders have agreed to make available to the Borrower a Guarantee Facility, available in U.S.
dollars, euros, Sterling or certain other approved currencies, in an amount of up to the equivalent of
U.S.$250 million. The Guarantee Facility may be utilised by the Borrower to provide letters of credit,
guarantees or other instruments of similar nature, each as required in the ordinary course of business of
the Parent, the Borrower and their respective subsidiaries.The Guarantee Facility may not be utilised
unless Term Facility A has been utilised in full and/or cancelled.
If the Borrower and the Lenders agree, a Lender may provide ‘‘Ancillary Facilities’’ in place of all or
part of that Lender’s unutilised Revolving Facility commitment.
Interest Rate
The interest rate applicable to loans made under the Term Facilities and Revolving Facility is equal to
LIBOR, or, in the case of loans in Euros, to EURIBOR, in each case, increased by the margin (equal to
0.75%, with forecast for revisions decreasing to 0.45% when certain predetermined financial parameters
are met) and other mandatory costs, if any. However, if at any time the Parent, the Borrower and their
260
9.
Trade and other receivables (Continued)
Related party disclosures
Receivables from associates and joint ventures are as follows:
December 31, 2005
(US$000)
Loxley GTECH Private Ltd. . . . . . . . . . . . . . . . .
Lottery Technology Services Corporation . . . . . . .
Uthingo Management Proprietary Limited . . . . . .
The Republic of Italy (Cogetech) . . . . . . . . . . . .
Lottery Technology Enterprises . . . . . . . . . . . . . .
Wireless Business Solutions (Proprietary) Limited
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$3,619
2,264
1,047
852
274
105
$8,161
Lottery Technology Services Corporation
We have a 44% interest in Lottery Technology Services Corporation (‘‘LTSC’’), which we account for
using the equity method of accounting. LTSC provides equipment and services (which we supplied to
LTSC), to the Taipei Fubon Bank. The Taipei Fubon Bank holds the license to operate the Taiwan Public
Welfare Lottery. Revenues from LTSC were $18.4 million during calendar 2005.
Uthingo Management Proprietary Limited
We have a 10% interest in Uthingo Management Proprietary Limited (‘‘Uthingo’’), which is
accounted for using the equity method of accounting. Uthingo holds the license to operate the South
African National Lottery. Revenues from Uthingo were $11.4 million during calendar 2005.
the Republic of Italy (Cogetech SPA)
We have a 35% interest in Cogetech SPA which is accounted for using the equity method of
accounting. Cogetech SPA operates a communications network and related central computer system
linking gaming machines in the Republic of Italy. Revenues from Cogetech SPA were $1.4 million during
calendar 2005.
Lottery Technology Enterprises
We have a 1% interest in Lottery Technology Enterprises (‘‘LTE’’) which is accounted for using the
cost method of accounting. LTE holds a 10-year contract (which expires in November 2009) with the
District of Columbia Lottery and Charitable Games Control Board. Revenues from LTE were $3.9 million
during calendar 2005.
Wireless Business Solutions (Proprietary) Limited
We have a 40% interest in Wireless Business Solutions (Proprietary) Limited (‘‘WBS’’), an entity that
holds a national mobile data telecommunications license issued by the South African government and is
the telecommunications provider to Uthingo. In 2005, we determined that we no longer had a controlling
interest in WBS that would require consolidation in our financial statements due principally to the
D-32
10.
Financial instruments
Fair values
Set out below is a comparison by category of the carrying amounts and fair values of our financial
instruments at December 31, 2005.
Carrying
Fair
Amount
Value
(US$000)
Financial assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 178,513
$ 178,513
Investment securities available-for-sale
State and Municipal Auction Rate Securities . . . . . . . . . . .
State and Municipal Variable Rate Demand obligations . . .
176,025
84,700
176,025
84,700
Subtotal investment securities available-for-sale . . . . . . . . . .
$ 260,725
$ 260,725
Financial liabilities
Long-term debt
4.75% Senior Notes due October 2010 . . . . . . . . . .
4.50% Senior Notes due December 2009 . . . . . . . .
5.25% Senior Notes due December 2010 . . . . . . . .
1.75% Convertible Debentures due December 2021
Fair value of interest rate swaps . . . . . . . . . . . . . . .
Other, due through October 2007 . . . . . . . . . . . . .
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(248,229)
(148,652)
(147,585)
(16,275)
3,800
(2,600)
(247,832)
(147,618)
(152,738)
(33,278)
3,800
(2,600)
Subtotal long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(559,541) $(580,266)
Other liabilities
Fair value of interest rate swaps . . . . . . . . . . . . . . . . . . . .
$
(3,800) $
(3,800)
Cash and cash equivalents are stated at cost, which approximate fair value.
Investment securities are designated as available-for-sale and are stated at cost, which approximates
fair value. We invest in short-term investments that are generally highly liquid and are assigned a minimal
credit rating of A- or A3 from Standard and Poor’s or Moody’s Investor Service, respectively. Any
unrealized gains and losses, net of income tax effects, would be recognized as a separate component of
equity until the investment is derecognized or until the investment is determined to be impaired at which
time the cumulative gain or loss previously reported in equity is included in the income statement.
The carrying amount and estimated fair values of our long-term debt are determined by an
independent investment banker. The fair value of forward currency contracts is calculated by reference to
current forward exchange rates for contracts with similar maturity profiles.
D-34
Lottomatica’s 4.80% Senior Notes due 2008
Lottomatica has outstanding A360.0 million of 4.80% senior notes due 2008 (the ‘‘2008 Notes’’). In
connection with the Acquisition, Lottomatica and certain subsidiaries will enter into a deed poll pursuant
to which the 2008 Notes will be guaranteed by substantially the same subsidiaries as those guaranteeing or
borrowing under the Senior Credit Facilities. The 2008 Notes accrue interest annually in arrear at a rate of
4.80% per annum. Payments on the 2008 Notes are made in euro. The 2008 Notes constitute obligazioni
pursuant to Articles 2410 et seq. of the Italian Civil Code. The 2008 Notes rank pari passu with other
unconditional unsubordinated obligations of Lottomatica. Unless previously redeemed or cancelled, the
2008 Notes will be redeemed at their principal amount December 22, 2008. The 2008 Notes are subject to
redemption in whole, but not in part, at their principal amount at the option of Lottomatica at any time in
the event of certain changes affecting taxation in the Republic of Italy. The 2008 Notes do not contain any
material covenants and are subject to customary events of default provisions.
Intercreditor Deed
The Trust Deed for the Securities provides that the Trustee is authorised (without any further consent
of Securityholders) on behalf of the Securityholders to enter into the Intercreditor Deed in favour of the
lenders under the Senior Credit Facilities to give effect to the subordination of the Securities.
The Intercreditor Deed provides that in the event of the commencement of (i) a voluntary or
involuntary liquidation, dissolution or winding-up of Lottomatica due to corporate action or administrative
and/or a court order, or (ii) the occurrence of any insolvency proceedings, subject to applicable bankruptcy
law, all claims against Lottomatica in respect of the Securities will be subordinated to the prior payment in
full of its liabilities under the financing documents referred to in any Senior Credit Facilities Agreement
(the ‘‘Senior Liabilities’’).
If upon or following the occurrence of any of the above insolvency events in relation to Lottomatica
and at any time prior to the date when all Senior Liabilities have been irrevocably discharged and no
commitments remain outstanding thereunder (the ‘‘Senior Discharge Date’’), the Trustee receives any
distribution in cash or in kind in respect of the Securities, the Trustee must notify the agent under the
Intercreditor Deed and will be obliged to promptly pay such amount to the agent for application towards
the Senior Liabilities.
The provisions of the Intercreditor Agreement may not be amended or modified without the written
consent of the Trustee if such amendment or modification affects the rights or obligations of the Trustee,
on behalf of the Securityholders, thereunder. The Intercreditor Deed also provides that such provisions
constitute a continuing agreement with holders of Senior Liabilities, or of any refinancing, replacement,
extension, supplement or restructuring of such liabilities (the ‘‘Refinanced Senior Liabilities’’).
The Trust Deed also provides that each Securityholder, by accepting a Security, will be deemed to
have:
• appointed and authorised the Trustee to enter into and give effect to the provisions of the
Intercreditor Deed;
• authorised the Trustee to become a party to any future intercreditor arrangements with the holders
of any Refinanced Senior Liabilities to ensure that such holders benefit from the same provisions as
are set out above in relation to the Senior Liabilities; and
• agreed to be bound by the provisions of the Intercreditor Deed and the provisions of any such
future intercreditor arrangements.
263
GTECH Indebtedness
As of February 25, 2006 GTECH had three series of senior notes outstanding:
December 2014;
October 2010; and
December 2009.
The terms of the Senior Credit Facilities Agreement require that the borrower thereunder exercise (or
cause the exercise of) the call options under the terms of these senior notes within five business days after
completion of the Acquisition.
Generally, under the terms of the indentures applicable to these senior notes, GTECH may redeem
all or part of the senior notes prior to their maturity at any time on at least 30 days’ notice at a redemption
price equal to the greater of (i) 100% of the principal amount of the notes being redeemed and (ii) the
sum of the present values of the principal amount of the senior notes being redeemed and the remaining
scheduled payments of interest on such senior notes, discounted from their respective scheduled payment
dates to the redemption date on a semi-annual basis at the treasury rate (as defined in the relevant
indentures) plus 20 basis points, in the case of the 5.25% notes, 20 basis points, in the case of the 4.75%
notes, and 15 basis points, in the case of the 4.50% notes, plus, in each case, accrued interest to the
redemption date. Lottomatica anticipates costs of approximately U.S.$10.0 million in connection with the
refinancing of such indebtedness.
As of April 25, 2006, there was approximately U.S.$6.0 million in aggregate principal amount of
GTECH’S Convertible Debentures outstanding. Such Convertible Debentures are convertible into shares
of GTECH common stock and, if still outstanding following completion of the Acquisition, will become
convertible into cash. In addition, GTECH has a U.S.$500 million credit facility which was undrawn as of
March 31, 2006, excluding U.S.$2.5 million of letters of credit. This existing credit facility will be
terminated upon, or prior to completion of, the Acquisition.
264
14.
Dividends paid and proposed
At December 31, 2005
Declared
Declared and paid and unpaid Total Dividends
US$000
Dividends on common stock:
January 2005 ($0.085 per share) . .
April 2005 ($0.085 per share) . . . .
June 2005 ($0.085 per share) . . . .
October 2005 ($0.085 per share) . .
December 2005 ($0.085 per share)
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Dividends declared prior to January 2005 and unpaid at
December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.
$ 9,843
9,771
10,518
10,635
—
$
54
78
66
65
10,817
$ 9,897
9,849
10,584
10,700
10,817
$40,767
$11,080
$51,847
—
179
179
$40,767
$11,259
$52,026
Share-based payment plans
Equity-settled share option plans
We have various share-based compensation plans whereby nonemployee members of our Board of
Directors, officers and other key employees may receive grants of incentive stock options, nonqualified
stock options, restricted stock, stock appreciation rights and performance awards. We are authorized to
grant up to 27.2 million shares of common stock under these plans and approximately 5.9 million shares
were available for grant at December 31, 2005.
The stock options granted under these plans are to purchase our common stock at a price not less
than fair market value at the date of grant. Stock options granted prior to April 2005 generally vest ratably
over a four-year period from the date of grant and subsequent grants generally vest ratably over a four-year
period beginning on the second anniversary date of the grant. Stock options expire 10 years after the date
of grant (unless an earlier expiration date is set at the time of grant) and are subject to possible earlier
exercise and termination in certain circumstances. Stock options are generally forfeited if the employee
leaves the Company before the stock options vest. We have no cash-settled share-based payments.
D-40
Securities sold in reliance on Regulation S shall be known as ‘‘Unrestricted Securities’’. The
Unrestricted Securities are initially evidenced by a single global certificate in registered form without
interest coupons (the ‘‘Unrestricted Global Certificate’’). The Unrestricted Global Certificate shall be
deposited with a common depositary (the ‘‘Common Depositary’’) of Euroclear Bank S.A./N.V.
(‘‘Euroclear’’) and Clearstream Banking, société anonyme (‘‘Clearstream, Luxembourg’’) and registered in
the name of a nominee of the Common Depositary.
Securities sold to qualified institutional buyers in reliance on an exemption from the registration
requirements of the Securities Act (including the exemption provided by Rule 144A) shall be known as
‘‘Restricted Securities’’. Restricted Securities are initially evidenced by a single global certificate in registered
form without interest coupons (the ‘‘Restricted Global Certificate’’ and, together with the Unrestricted
Global Certificate, the ‘‘Global Certificates’’). The Restricted Global Certificate shall be deposited with the
Common Depositary of Euroclear and Clearstream, Luxembourg and registered in the name of a nominee
of the Common Depositary. The Restricted Global Certificate is subject to certain restrictions on transfer
set forth therein and in the Paying Agency Agreement and bears the legend regarding such restrictions as
set out in the Trust Deed.
Except in the limited circumstances set out therein, the Global Certificates shall not be exchangeable
for definitive certificates (‘‘Definitive Certificates’’ and, together with the Global Certificates, the
‘‘Certificates’’).
1.2 Title
Title to the Securities passes only by transfer and registration in the Register as described below. The
registered holder of any Security shall (except as otherwise required by law or as ordered by a court of
competent jurisdiction) be treated as its absolute owner for all purposes (whether or not it is overdue and
regardless of any notice of ownership, trust or any interest in it or any writing on, or the theft or loss of, the
related Certificate issued in respect of it (other than a duly executed transfer thereof)) and no person
(including, without limitation, the Issuer and the Trustee) shall be liable for so treating the holder. In these
Conditions, ‘‘Securityholders’’ and ‘‘holder’’ means the persons or person in whose name a Security is
registered.
1.3 Register
The Issuer will cause to be kept at the specified office of the Registrar and in accordance with the
terms of the Paying Agency Agreement, a register (the ‘‘Register’’) on which shall be entered the names and
addresses of the holders and the particulars of the Securities held by them and of all transfers of, and
payments on, the Securities. If Definitive Certificates are issued, each Securityholder will be entitled to
receive only one Definitive Certificate in respect of its entire holding.
1.4 Transfers
Subject to the provisions contained herein and in the Paying Agency Agreement, and mandatory
provisions of applicable law, the Securities may be transferred, in whole or in part in an Authorised
Denomination, by the delivery of the Certificate issued in respect of such Security, with the form of
transfer on the back duly completed and signed by the holder or his attorney duly authorised in writing, to
the specified office of the Registrar or any Paying and Transfer Agent. No transfer of title shall be valid
unless entered on the Register.
Ownership of interests in the Global Certificates (‘‘Book-Entry Interests’’) shall be limited to persons that
have accounts with Euroclear and Clearstream, Luxembourg, or persons that may hold interests through their
participants. Book-Entry Interests shall be shown on, and transfers thereof shall be effected only through,
records maintained in book-entry form by Euroclear and Clearstream, Luxembourg and their participants.
Transfers of beneficial interests in the Securities will be subject to the applicable rules and procedures of
266
18.
Impairment testing of goodwill and intangibles with indefinite lives (Continued)
Carrying amount of goodwill and trademarks at December 31, 2005:
Goodwill
Trademarks
(US$000)
Lottery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gaming Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$192,314
113,876
24,973
$
—
2,900
—
$331,163
$2,900
Key assumptions used in the value in use calculation of Lottery, Gaming Solutions and Commercial
Services units for December 31, 2005
The following describes each key assumption on which management has based its cash flow
projections to undertake impairment testing of goodwill and trademarks.
Service revenues and related profit—Projected cash flows from service revenues assumes the
continuation of recent historical trends adjusted for expected new contract wins, anticipated contract
renewal pricing pressures, and the expected impact of sales and marketing initiatives that are being
developed or expected to be developed.
Product sales and related profit—Projected cash flows from product sales assumes renewal orders from
existing customers in connection with known upcoming procurements, along with orders from new or
developing customers and markets, at selling prices generally in line with historical experiences adjusted
for expected competitive pressures.
Management believes that any reasonably possible change in any of the key assumptions on which the
Lottery, Gaming Solutions and Commercial Services unit’s recoverable amount is based would not cause
the unit’s carrying amount to exceed its recoverable amount.
19.
Employee benefits
During 2005 we had two defined contribution 401(k) retirement savings and profit sharing plans (the
‘‘Plans’’) covering substantially all employees in the United States and the Commonwealth of Puerto Rico.
The Commonwealth of Puerto Rico Plan was terminated on December 31, 2005.
Under these Plans, an eligible employee may elect to defer receipt of a portion of base pay each year.
We contribute this amount on the employee’s behalf to the Plans and also make a matching contribution.
For 2005, our matching contributions were equal to 100% on the first 3% that the employee elects to defer.
Employees are fully vested at all times in the amounts they defer and in any earnings on these
contributions. Employees are fully vested in the Company’s matching contributions and any earnings on
these contributions on the first anniversary of their date of hire. Benefits under the Plans will generally be
paid to participants upon retirement or in certain other limited circumstances.
In 2005 we recorded $3.4 million of expense under the Plans, which is included in Personnel in our
Consolidated Income Statement.
D-45
20.
Commitments and contingencies
Leases
We lease certain facilities and equipment under noncancelable operating leases that expire at various
dates through 2014. Certain of these leases have escalation clauses and renewal options. We are required
to pay all maintenance costs, taxes and insurance premiums relating to our leased assets. There are no
restrictions placed upon us by entering into these leases.
Future minimum lease payments under non-cancelable operating leases at December 31, 2005 are as
follows:
Lease
Payments
(US$000)
Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
After one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . .
More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14,402
30,170
2,043
$46,615
Rental expense for operating leases was $23.4 million in 2005.
Contracts
Our facilities management contracts generally contain time schedules for, among other things,
commencement of system operations and the installation of terminals, as well as detailed performance
standards. We are typically required to furnish substantial bonds to secure our performance under
contracts. In addition to other possible consequences, including contract termination, failure to meet
specified deadlines or performance standards could trigger substantial penalties in the form of liquidated
damage assessments. Many of our contracts permit the customer to terminate the contract at will and do
not specify the compensation, if any, that we would be entitled to, were such a termination to occur. In
2005, we paid or incurred liquidated damages (with respect to our contracts) of $8.4 million.
Acquisition
We entered into an agreement in December 2004, as amended in January 2006, to acquire a 50%
controlling equity position in the Atronic group of companies (‘‘Atronic’’) owned by Paul and Michael
Gauselmann (the ‘‘Gauselmanns’’). The remaining 50% of Atronic will be retained by the Gauselmanns.
Atronic is a video slot machine manufacturer and also develops slot machine games and customized
solutions for dynamic gaming operations. This transaction is contingent upon regulatory and gaming
license approvals and other closing conditions, and is expected to be completed by mid-2007.
The final purchase price for Atronic will be calculated pursuant to a performance-based formula equal
to eight times Atronic’s EBITDA (earnings before interest, taxes, depreciation and amortization) for its
fiscal year ending December 31, 2006, provided however, that the payment shall not be less than Euro
20 million. In addition, the Gauselmanns have the potential to receive an earn-out payment one year after
the closing, if Atronic’s 2007 performance exceeds certain specified thresholds. We currently expect the
all-cash transaction will have a total value of approximately $100 million to $150 million, for our 50%
share, including the assumption of debt.
D-46
The period beginning on (and including) the Issue Date and ending on (but excluding) the first Fixed
Rate Payment Date and each successive period beginning on (and including) a Fixed Rate Payment Date
and ending on (but excluding) the next succeeding Fixed Rate Payment Date, regardless of any deferral of
payments in accordance with Condition 4, is called a ‘‘Fixed Rate Interest Period’’. The amount of interest
payable for the Fixed Rate Interest Period or part thereof on each Security determined in accordance with
this Condition 3.1 is called a ‘‘Fixed Rate Interest Amount’’. The Fixed Rate Interest Amount scheduled to
be paid (subject to Condition 4) in respect of each full Fixed Rate Interest Period shall be A4,125 per
A50,000 in principal amount of the Securities, except that the first Fixed Rate Interest Amount scheduled
to be paid (subject to Condition 4) on March 31, 2007 in respect of the period from (and including)
May 17, 2006 to (but excluding) March 31, 2007, shall be A3,593.84 per A50,000 in principal amount of the
Securities. Where, prior to the Reset Date, interest is to be calculated in respect of a period which is
shorter than a Fixed Rate Interest Period, the day-count fraction used will be the number of days in the
relevant period, from (and including) the date from which interest begins to accrue to (but excluding) the
date on which it becomes payable, divided by the number of days in the Fixed Rate Interest Period in
which the relevant period falls.
3.2 Floating Rate Payment Dates
Subject to Condition 6.4, the Securities bear interest on their aggregate principal amount from (and
including) the Reset Date to (but excluding) the Maturity Date at the rates determined in accordance with
Conditions 3.3 and 3.4, but in any case, will be no greater than the maximum rate in respect of each
Floating Rate Interest Period (as defined below) permitted by then applicable Italian law (the ‘‘Floating
Interest Rate’’) payable (subject to Condition 4) semi-annually in arrear on or about March 31 and
September 30 in each year (each a ‘‘Floating Rate Payment Date’’ and together with the Fixed Rate Payment
Dates, the ‘‘Interest Payment Dates’’) commencing on the Floating Rate Payment Date falling in September,
2016 and ending on (and including) the Maturity Date. If any Floating Rate Payment Date would
otherwise fall on a day which is not a business day, it shall be postponed to the next day which is a business
day unless it would thereby fall into the next calendar month in which event it shall be brought forward to
the immediately preceding business day.
The period beginning on (and including) the Reset Date and ending on (but excluding) the first
Floating Rate Payment Date and each successive period beginning on (and including) a Floating Rate
Payment Date and ending on (but excluding) the next succeeding Floating Rate Payment Date, regardless
of any deferral of payments in accordance with Condition 4, is called a ‘‘Floating Rate Interest Period’’ and,
together with each Fixed Rate Interest Period, an ‘‘Interest Period’’. The amount of interest payable in
respect of the relevant Floating Rate Interest Period or part thereof determined in accordance with this
Condition 3.2 and Conditions 3.3 and 3.4 is called a ‘‘Floating Rate Interest Amount’’, and, together with
each Fixed Rate Interest Amount, a ‘‘Scheduled Interest Amount’’ (which shall include interest accrued
which becomes payable in respect of part of an Interest Period).
3.3 Floating Interest Rate
The Floating Interest Rate in respect of the Securities will be determined by the Agent Bank on the
following basis:
(a) On the second business day before the beginning of each Floating Rate Interest Period (the
‘‘Interest Determination Date’’) the Agent Bank will determine the Euro Interbank Offered Rate
(‘‘EURIBOR’’) for six-month euro deposits as at 11.00 a.m. (Brussels time) on the relevant
Interest Determination Date. Such offered rate will be that which appears on the display
designated as page ‘‘248’’ on the Telerate Monitor (or such other page or service as may replace it
for the purpose of displaying such rates). The Floating Interest Rate for such Floating Rate
Interest Period shall be the aggregate of the Margin and the rate which so appears, as determined
by the Agent Bank.
269
20.
Commitments and contingencies (Continued)
believe that any present or former employee of GTECH or GTECH Brazil committed any criminal offense
in connection with obtaining the 2003 Contract Extension. Nevertheless, there can be no assurance that the
Public Ministry Attorneys will not seek to indict or initiate criminal charges against one or more current or
former GTECH Brazil employees in the wake of the issuance of the congressional report, or that the final
congressional report will not request additional action against GTECH.
As previously reported, the SEC began an informal inquiry in February 2004, which informal inquiry
and Rovai, and GTECH’s involvement in the facts surrounding the 2003 Contract Extension, to ascertain
whether there has been any violation of United States law in connection with these matters. In addition, in
with GTECH and the SEC. GTECH has cooperated fully with the SEC and the United States Department
of Justice with regard to these matters, including by responding to their requests for information and
documentation.
To date GTECH has found no evidence that it, or any of its current or former employees, has violated
any United States law, or is otherwise guilty of any wrongdoing in connection with these matters.
any of its current or former employees that is attributable to GTECH could have a material adverse effect
on GTECH’s results of operations, business or prospects, including its ability to retain existing contracts or
to obtain new or renewal contracts within Brazil and elsewhere.
Civil Action By The Public Ministry Attorneys. As previously reported, in April 2004 the Public Ministry
Attorneys initiated a civil action in the Federal Court of Brasilia against GTECH Brazil; 17 former officers
and employees of CEF; the former president of Racimec; Antonio Carlos Rocha; and Marcos Andrade,
another former officer of GTECH Brazil. The focus of this civil action is the contractual relationship
between CEF, GTECH Brazil and Racimec during the period 1994 to 2002. This civil action alleges that
the defendants acted illegally in entering into, amending and performing, the 1997 Contract, and the 2000
Contract.
paid to GTECH under the 1997 Contract and the 2000 Contract, and certain other permitted amounts,
minus GTECH’s proven investment costs. The applicable statute also permits the assessment of interest
and, in the discretion of the court, penalties of up to three times the amount of the damages imposed.
GTECH estimates that through the date of the lawsuit it received under the 1997 Contract and the 2000
Contract a total of approximately 1.5 billion Brazilian reals (or approximately 641 million United States
dollars at currency-exchange rates in effect as of December 31, 2005). In addition, although it is unclear
how investment costs would be determined for purposes of this lawsuit, GTECH estimates that its
investment costs through the date of the lawsuit were approximately between 1.2 billion and 1.4 billion
Brazilian reals (or approximately between 513 million and 598 million United States dollars) at currency
exchange rates in effect as of December 31, 2005 in aggregate; however, these investment costs could be
disputed by CEF, and are ultimately subject to approval by the court.
As previously reported, GTECH believes it has good and adequate defenses to the claims made in this
lawsuit. GTECH intends to defend itself vigorously in these proceedings, which, GTECH has been advised
by its Brazilian counsel, are likely to take several years, and could take longer than 15 years in certain
D-49
20.
GTECH plans to vigorously defend itself and its directors against the claims made in these lawsuits,
which it believes to be without merit. Nevertheless, at the present time GTECH is unable to predict the
outcome of these lawsuits.
In February 2005, GTECH Foreign Holdings Corporation, Argentina Branch (‘‘GFHC’’) and
GTECH’s Argentina legal counsel, Dr. Jorge Perez of Perez, del Barba and Rosenblum, received
(‘‘BofA-North Carolina’’), in consideration for the payment of 1.4 million Argentina pesos. Upon maturity
of the CD, the agreement provided for BofA-North Carolina to pay 571,429 United States dollars to a
GFHC branch bank account in the United States. GTECH understands that the central claim of the
D-53
20.
Argentina Central Bank’s indictment will be that GFHC’s agreement with BofA was a transaction in which
foreign currency was transferred, in essence, from Argentina to the United States in violation of applicable
Argentina law.
If GFHC is found guilty of violating applicable Argentina currency exchange laws, as charged in the
indictment, GTECH would be liable to pay a fine of up to approximately 5.7 million United States dollars
(i.e., ten times the amount of United States dollars allegedly transferred from Argentina) and could be
prohibited for up to ten years from importing goods into, or exporting goods from, Argentina.
GTECH notes that BofA, which solicited GTECH to enter into the BofA Agreement, and
approximately 20 other customers of BofA including several subsidiaries of large multi-national
corporations, have been indicted in connection with transactions similar to the transaction outlined in the
BofA Agreement. GTECH understands that the Central Bank of Argentina’s indictments against BofA
were rejected by the courts. BofA explicitly represented to GTECH in the BofA Agreement that the
transaction described therein did not violate any Argentina law or regulation, and GTECH believes that it
took appropriate measures independent of this representation (including obtaining the opinion of local
counsel) in advance of entering into the BofA Agreement to ascertain that this transaction was legal under
applicable Argentina law. GTECH believes that it has good defenses to the claims made in the indictment,
and GTECH intends to vigorously defend itself in these proceedings. GTECH does not believe that the
outcome of this suit will have a material impact on its results of operations or business.
Trinidad and Tobago
In 1993, a subsidiary of GTECH and the National Lottery Control Board (‘‘NLCB’’) of Trinidad and
Tobago (‘‘Trinidad’’) entered into an agreement (the ‘‘Trinidad Agreement’’) for a five year term pursuant
to which GTECH would provide online lottery services and technology to the NLCB. GTECH assigned
that contract to a subsidiary (the ‘‘Subsidiary’’) doing business in Trinidad and Tobago. In July 1999, the
Trinidad Agreement was amended to extend the term for an additional seven years, and to increase the
compensation that the Subsidiary would receive if lottery proceeds in Trindad exceeded a stated threshold.
The extension amendment also provides that GTECH would undertake to provide community programs in
Trinidad.
From 1999 until 2001, the Subsidary paid $1.9 million to a private entity in connection with a proposal
to provide community services in Trinidad. In March 2006, representatives of the Attorney General of
Trinidad contacted GTECH regarding an allegation that a portion of that amount was paid by the private
entity to a person who was a financial supporter of a Trinidad political party, and that the private entity had
provided no services in return for the payments. GTECH has commenced an investigation into the
circumstances surrounding the payments. The investigation is ongoing.
GTECH has informed the SEC about the allegations and investigation. The SEC or other law
enforcement agencies in the United States or Trinidad may commence investigations and actions as a
result of the allegations or the investigation. The NLCB also may pursue an investigation or commence
legal action as a result of the allegations. In the event that any such investigation or action is commenced,
GTECH may be subject to fines, penalties or adverse judgments in amounts that cannot be determined at
this time.
D-54
(b) the tenth anniversary of the Interest Payment Date on which such payment thereof was first
deferred in accordance with these Conditions;
(c) the due date for redemption of the Securities, whether at the Maturity Date, any Early
Redemption Date, or the date on which the Securities become immediately due and repayable
pursuant to Condition 9.3;
(d) the date which is 180 days after the date on which any petition is filed by any third party in
connection with any Insolvency Proceedings in respect of the Issuer, where such petition has not
been dismissed by such 180th day; and
(e) the date on which an order is made or a resolution is passed for the voluntary or involuntary
liquidation, dissolution or winding up of, or an administrative and/or court order is made for any
Insolvency Proceedings in respect of, the Issuer, or the date on which the Issuer takes any
corporate action for the purposes of opening, or initiates or consents to, Insolvency Proceedings
in respect of it.
5.
EQUITY FUNDING OF EQUITY FUNDED DEFERRED INTEREST
5.1 Authorised Equity
For so long as any Securities are outstanding (as defined in the Trust Deed), the Issuer undertakes to
take all steps necessary (in compliance with applicable law) to keep available, as of the date of each
Annual General Meeting, Sufficient Authorised Equity.
Such steps shall include, but not be limited to the following:
(a) if, in the opinion of the board of directors of the Issuer prior to the date of each Annual General
Meeting, the Issuer will not have available on the date of such Annual General Meeting a
sufficient amount of Authorised Equity to fund the payment of all outstanding Equity Funded
Deferred Interest, the board of directors of the Issuer shall, in compliance with any applicable
law, propose a resolution at such Annual General Meeting for shareholders to resolve on the
authorisation for the issuance of ordinary shares in such number as will enable the Issuer to
(i) pay in full all accrued and unpaid Equity Funded Deferred Interest pursuant to Condition 5.2
and (ii) after doing so, have available Sufficient Authorised Equity. The Issuer shall estimate the
number of ordinary shares required for this purpose based on the prevailing market price for
such ordinary shares on or around the time of proposing such resolution; and
(b) if any resolution relating to the authorisation and issuance of new ordinary shares for the
payment of Equity Funded Deferred Interest proposed as provided in Condition 5.1(a) is not
approved and adopted by the shareholders of the Issuer at such Annual General Meeting, the
board of directors of the Issuer shall, in compliance with applicable law, propose a similar
resolution at the next Annual General Meeting of the Issuer. This process shall be repeated, in
compliance with applicable law, until the relevant resolution is approved and adopted.
If the Issuer does not have a sufficient number of ordinary shares available for issue, then the Issuer
shall give notice thereof to the Trustee (in an Officer’s Certificate of the Issuer) and the Securityholders in
accordance with Condition 15. The Issuer shall thereafter give notice to the Trustee (in an Officer’s
Certificate signed of the Issuer) and the Securityholders in accordance with Condition 15 of the
subsequent approval and adoption by the shareholders of the Issuer of any resolution relating to the
authorisation for issuance of ordinary shares to fund the payment of such unpaid Equity Funded Deferred
Interest, promptly following the date of the Annual General Meeting at which such resolution is passed.
The shareholders of the Issuer have initially authorised for issuance Authorised Equity of up to
B170 million in connection with these provisions.
273
5.2 Payment of Equity Funded Deferred Interest
For as long as any Equity Funded Deferred Interest (or part thereof) remains unpaid, the Issuer must,
after obtaining all shareholder authorisations for the issue or creation of Issuer Equity, in compliance with
any applicable law and subject to Condition 5.3, promptly fund the full payment in cash of such Equity
Funded Deferred Interest, using the proceeds derived from the issue, offer and sale or contribution of
Issuer Equity raised in accordance with this Condition 5.2.
Promptly following the date on which Mandatorily Deferred Interest or Old Optionally Deferred
Interest, as the case may be, arises, the Issuer shall, after obtaining all shareholder authorisations for the
issue or creation of Issuer Equity, in compliance with any applicable law and subject to Condition 5.3:
(i) procure the issue, offer and sale or contribution of such amount of Issuer Equity as will result in
proceeds received by the Issuer, after any expenses relating thereto, of not less than the aggregate
amount of unpaid Equity Funded Deferred Interest; and
(ii) deliver to the Trustee or to the Principal Paying Agent a cash amount equal to the amount of
unpaid Equity Funded Deferred Interest as soon as practicable, but in any event within twenty
business days following the settlement of the relevant issue, offer and sale or contribution of
Issuer Equity. If such cash amount is received by the Trustee, the Trustee shall pay such amount
to the Principal Paying and Transfer Agent. The Principal Paying and Transfer Agent shall pay the
amount received by it to the Securityholders in respect of the relevant Equity Funded Deferred
Interest within ten business days following receipt thereof by the Principal Paying and Transfer
Agent (such date, the ‘‘Equity Funded Deferred Interest Payment Date’’).
If the proceeds of the issue, offer and sale or contribution of Issuer Equity received by the Issuer
pursuant to paragraph (i) above are insufficient to pay in full all unpaid Equity Funded Deferred Interest
on the relevant Equity Funded Deferred Interest Payment Date, then: (A) the Issuer’s obligations pursuant
to this Condition 5.2 shall continue until all unpaid Equity Funded Deferred Interest has been paid in full;
and (B) any payment in respect of Equity Funded Deferred Interest made to Securityholders on such
Equity Funded Deferred Interest Payment Date will be applied pro rata to all Securityholders and the
Issuer shall be released and discharged from its obligations under this Condition 5.2 only to the extent of
such amount applied, and the Securityholders shall have no further claim against the Issuer to that extent
(without prejudice to any claims in respect of any amount of Equity Funded Deferred Interest that remains
unpaid).
5.3 Market Disruption Event
The Issuer shall not be obliged to pay Equity Funded Deferred Interest pursuant to Condition 5.2 if a
Market Disruption Event has occurred and for so long as it is continuing, but the Issuer’s obligations
contained in Condition 5.2 shall recommence immediately upon the cessation of such Market Disruption
Event. The Issuer shall, as soon as practicable after becoming aware of the occurrence of a Market
Disruption Event at any time whilst any Equity Funded Deferred Interest remains unpaid, notify the same
to the Trustee (in an Officer’s Certificate of the Issuer) and to the Securityholders in accordance with
Condition 15. An Officer’s Certificate of the Issuer addressed to the Trustee as to the occurrence of a
Market Disruption Event may be relied upon by the Trustee as sufficient evidence thereof and if so relied
upon shall be conclusive and binding on the Issuer, the Trustee and the Securityholders.
274
5.4 Capital Restriction
Until such time as all unpaid Equity Funded Deferred Interest has been paid in full in cash in
accordance with Conditions 4.3 and 5.2 (and, in the case of paragraph (c) below, for a period of one year
thereafter) the Issuer:
(a) shall not declare or make a payment of, or resolve on the declaration or payment of, a
distribution or any other similar payment with respect to any Junior Obligations (other than
ordinary share capital) or Distribution Parity Securities, other than a payment in the form of
Issuer Equity; and
(b) subject to paragraph (c) below, shall not redeem, repurchase or acquire any Junior Obligations or
Parity Securities for any consideration, other than the purchase of fractional interests in Junior
Obligations or Parity Securities pursuant to any conversion or exchange provisions of such Junior
Obligations or Parity Securities; and
(c) shall not redeem, repurchase or acquire any Issuer Equity for any consideration, other than (i) in
connection with any existing or future employee benefit plan, directors’ and senior management’s
stock based compensation, directors’ stock option plan or similar arrangement; or (ii) a
reclassification of Issuer Equity or exchange or conversion of one class or series of Issuer Equity
into another class or series of Issuer Equity; or (iii) the purchase of fractional interests in Issuer
Equity pursuant to any conversion or exchange provisions of such Issuer Equity,
such restrictions shall be called the ‘‘Capital Restriction’’.
As at the date of this Offering Circular, no Parity Securities or Junior Obligations falling within the
exceptions to Condition 5.4(b) above were outstanding.
6.
REDEMPTION AND PURCHASE
The Securities may not be redeemed at the option of the Issuer other than in accordance with this
Condition 6.
6.1 Maturity date
If not redeemed or purchased and cancelled earlier, the Securities will be redeemed on the Maturity
Date at their principal amount together with any accrued and unpaid Scheduled Interest Amount, any
unpaid Optionally Deferred Interest and Equity Funded Deferred Interest (which Equity Funded Deferred
Interest may only be paid from the proceeds of the issue, offer and sale or contribution of Issuer Equity as
described in Condition 5) together with any Additional Amounts thereon (the ‘‘Redemption Price’’).
6.2 Redemption at the option of the Issuer
On giving not less than 30 nor more than 60 days’ notice to the Trustee and the Securityholders in
accordance with Condition 15 (which notice shall be irrevocable and shall specify the date fixed for
redemption) the Issuer may, at its option, redeem all but not some only of the Securities in cash on the
Reset Date or on any Floating Rate Payment Date thereafter, at the Redemption Price.
Upon the expiry of any such notice, the Issuer shall be obliged to redeem the Securities in accordance
with this Condition 6.2 and in accordance with mandatory provisions of applicable Italian law.
6.3 Redemption for taxation reasons
On giving not less than 30 nor more than 60 days’ notice to the Trustee and the Securityholders in
accordance with Condition 15 (which notice shall be irrevocable and shall specify the date fixed for
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redemption), the Issuer may, at its option, redeem all but not some only of the Securities in cash on any
date prior to the Reset Date:
(a) upon the occurrence of a Withholding Tax Event, at the Redemption Price; or
(b) upon the occurrence of a Tax Event, at the Make-Whole Price together with any accrued and
unpaid Scheduled Interest Amount, any unpaid Optionally Deferred Interest and Equity Funded
Deferred Interest (which Equity Funded Deferred Interest may only be paid from the proceeds of
the issue, offer and sale or contribution of Issuer Equity as described in Condition 5) and any
Additional Amounts thereon.
Prior to the publication of any notice of redemption pursuant to the above paragraphs, the Issuer shall
deliver or procure that there is delivered to the Trustee:
(A) an Officer’s Certificate of the Issuer stating that the Issuer is entitled to effect such redemption
and setting forth a statement of facts showing that the conditions precedent to the right of the
Issuer so to redeem have occurred (including, in the case of a Withholding Tax Event, that such
obligation to pay Additional Amounts cannot be avoided by the Issuer taking reasonable
measures available to it); and
(B) an opinion of an independent legal advisor of recognised standing under the laws of the Relevant
Taxing Jurisdiction to the effect that either (1) the Issuer has or will become obliged to pay such
Additional Amounts as a result of a Withholding Tax Event, or (2) that a Tax Event has occurred.
Notwithstanding the foregoing, no such notice of redemption will be given in respect of the
occurrence of a Withholding Tax Event (a) earlier than 90 days prior to the earliest date on which the
Issuer would be obliged to make such payment of Additional Amounts or withholding if any amounts in
respect of the Securities were then payable and (b) unless at the time such notice is given, the obligation to
pay Additional Amounts remains in effect.
6.4 Change of Control Call Event
(a) If at any time while the Securities are outstanding a Change of Control Event occurs prior to the
Reset Date, the Issuer may, not later than 60 days following the occurrence of such Change of
Control Event and on giving not less than 30 nor more than 60 days’ notice to the Trustee and the
Securityholders in accordance with Condition 15 (which notice shall be irrevocable and shall
specify the date fixed for redemption), at its option, redeem all but not some only of the
Securities in cash at the Make-Whole Price together with any accrued and unpaid Scheduled
Interest Amount, any unpaid Optionally Deferred Interest and Equity Funded Deferred Interest
(which Equity Funded Deferred Interest may only be paid from the proceeds of the issue, offer
and sale or contribution of Issuer Equity as described in Condition 5) and any Additional
Amounts thereon.
(b) If at any time while the Securities are outstanding a Change of Control Event occurs on or after
the Reset Date, the Issuer may, on the next Floating Rate Payment Date thereafter or, if the next
succeeding Floating Rate Payment Date falls less than 30 days from the date such Change of
Control Event occurs, then on the next Floating Rate Payment Date thereafter), on giving not
less than 30 nor more than 60 days’ notice to the Trustee and the Securityholders in accordance
with Condition 15 (which notice shall be irrevocable and shall specify the date fixed for
redemption), at its option, redeem all but not some only of the Securities in cash at the
Redemption Price.
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If a Change of Control Event occurs and the Issuer does not elect to redeem the Securities by giving
notice to the Trustee and the Securityholders in accordance with the provisions of Condition 6.4(a) or (b),
as the case may be, within the periods described therein, then the Securities shall, from the date on which
the Change of Control Event occurred, bear interest on their aggregate principal amount at a rate which is
(a) prior to the Reset Date, equal to the Change of Control Fixed Rate or (b) from (and including) the
Reset Date, equal to the Change of Control Floating Rate.
The Issuer has covenanted in the Trust Deed that, for so long as any Securities remain outstanding, on the
occurrence of a Change of Control Event, the Issuer will launch a tender offer for its outstanding B360 million
4.80% Senior Notes due 2008 (the ‘‘Senior Notes’’) at 100% of their aggregate principal amount. Such tender
offer shall be launched within a period of 20 days from the occurrence of such Change of Control Event, and
shall be made available, subject to applicable laws, to all holders of the Senior Notes.
6.5 Mandatory Redemption Event
If a Mandatory Redemption Event occurs, the Issuer shall redeem all, but not some only, of the
Securities on the Mandatory Redemption Date at 101% of their aggregate principal amount together with
any accrued and unpaid Scheduled Interest Amount and any Additional Amounts thereon. Any such
redemption shall be in accordance with mandatory provisions of applicable Italian law.
The Issuer will, within five business days after a Mandatory Redemption Event occurs, give notice
thereof to the Trustee (in an Officer’s Certificate of the Issuer) and the Securityholders in accordance with
Condition 15 and specifying the Mandatory Redemption Date.
Any failure by the Issuer to give notice as required by this Condition 6.5 shall not release the Issuer
from its obligation to redeem the Securities on the Mandatory Redemption Date.
6.6 Purchase
The Issuer or any of its subsidiaries may, at any time, purchase Securities in the open market or
otherwise at any price. Any purchase by tender shall be made available to all Securityholders alike, by
means of a public cash tender offer bid or a public exchange tender offer, in accordance with applicable
laws and regulations. Any Securities so purchased, pending cancellation in accordance with Condition 6.7,
shall not entitle the holder to vote at any meetings of the Securityholders and shall not be deemed to be
outstanding for the purposes of calculating quorums at meetings of the Securityholders or for the purposes
of Condition 12.1.
6.7 Replacement
The Issuer’s intention is (other than in relation to a mandatory redemption pursuant to Condition 6.5
above) only to redeem, repurchase or otherwise acquire the Securities for cash consideration prior to the
Maturity Date if the Issuer has received from parties that are not members of the Issuer Group cash
proceeds at least amounting to such consideration within a period of six months prior to such redemption,
repurchase or other acquisition from the issue, offer and sale or contribution of (a) Issuer Equity or
(b) other securities which contain terms that are substantially the same as the Securities in respect of
(i) enforcement rights and remedies of holders thereof, (ii) subordination of such holders’ claims in the
event of a liquidation, dissolution or winding up or Insolvency Proceedings in respect of the Issuer,
(iii) initial maturity and any early redemption provisions, (iv) the payment, deferral or non-payment of
scheduled distributions, (v) scheduled step up in distribution rate, if any, and (vi) replacement conditions
pertaining to early redemption, repurchase or acquisition of such other securities.
6.8 Cancellation
All Securities so redeemed or purchased in accordance with this Condition 6 will be cancelled and
may not be re-issued or resold.
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7.
PAYMENTS
7.1 Method of Payment
(a) Subject to Condition 4, payments of principal in respect of the Securities will be made to the
person shown in the Register at the close of business on the seventh business day in London,
Milan and the city in which the specified office of the Registrar is located before the due date for
the relevant payment (the ‘‘Record Date’’), and against presentation and surrender (or, in the case
of a partial payment, endorsement) of the relevant Certificate at the specified office of the
Registrar or any Paying and Transfer Agent by euro cheque drawn on, or by transfer to a euro
account maintained by the payee with, a bank in a city in which banks have access to the
TARGET System.
(b) Payments of interest due on an Interest Payment Date and payments in respect of Optionally
Deferred Interest and Equity Funded Deferred Interest will be made to the person shown in the
Register at the close of business on the relevant Record Date. Such payments on each Security
shall be made by euro cheque drawn on, or by transfer to a euro account maintained by the payee
with, a bank in a city in which banks have access to the TARGET System.
(c) Where payment is to be made by cheque, the cheque will be mailed, on the business day in
London, Milan and the city in which the specified office of the Registrar is located preceding the
due date for payment or, in the case of payments referred to in Condition 7.1(a), if later, on the
business day (in the city on which the specified office of the Registrar or the relevant Paying and
Transfer Agent with whom the Certificate is deposited is located) on which the relevant
Certificate is presented for surrender or endorsement, as applicable (at the risk and, if mailed at
the request of the holder otherwise than by ordinary mail, at the expense of the holder) to the
holder (or the first named of joint holders) of the Securities at its address appearing in the
Register.
(d) Securityholders will not be entitled to any interest or other payment for any delay after the due
date in receiving the amount due (i) as a result of the due date not being a business day, (ii) if the
Securityholder is late in presenting the relevant Certificate for surrender (or endorsement, as
applicable) or (iii) if a cheque mailed in accordance with this Condition 7.1 arrives after the date
for payment.
7.2 Payments subject to laws
All payments are subject in all cases to any applicable fiscal or other laws and regulations in the place
of payment, but without prejudice to the provisions of Condition 8. No commissions or expenses shall be
charged to the Securityholders in respect of such payments.
7.3 Payments on business days
A Certificate may only be presented for payment on a day which is a business day in the place of
presentation (and, in the case of payment by transfer to a euro account, in a city where banks have access
to the TARGET System). No further interest or other payment will be made if the day on which the
relevant Certificate may be presented for payment under this paragraph is a day falling after the due date.
In this Condition 7 ‘‘business day’’ means a day on which commercial banks and foreign exchange markets
settle payment and are open for general business (including dealing in foreign exchange and foreign
currency deposits) in the relevant city.
7.4 Agents
The initial Registrar, Paying and Transfer Agents and Agent Bank and their initial specified offices are
listed below. The Issuer reserves the right at any time with the approval of the Trustee to vary or terminate
the appointment of any Paying and Transfer Agent or the Agent Bank and appoint additional or other
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agents, provided that it will, at all times while any Security is outstanding, maintain (a) a Registrar, (b) a
Principal Paying and Transfer Agent (and for so long as any amounts remain payable in respect of the
Securities), (c) an Agent Bank, (d) Paying and Transfer Agents having specified offices in at least two
major European cities approved by the Trustee (including Luxembourg, so long as the Securities are listed
on the Luxembourg Stock Exchange) and (e) a Paying and Transfer Agent with a specified office in a
European Union member state that will not be obliged to withhold or deduct tax pursuant to European
Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN
Council meeting of November 26-27, 2000 on the taxation of savings income or any other law
implementing or complying with, or introduced in order to conform to, such Directive.
If any of the Registrar, Agent Bank or Principal Paying and Transfer Agent is unable or unwilling to
act as such or if it fails to make any determination or calculation or otherwise fails to perform its duties
under these Conditions or the Paying Agency Agreement, as the case may be, the Issuer shall appoint, on
terms acceptable to the Trustee, an independent investment bank acceptable to the Trustee to act as such
in its place.
7.5 Fractions
When making payments to Securityholders, if the relevant payment is not of an amount which is a
whole multiple of A0.01, such payment will be rounded down to the nearest A0.01.
8.
TAXATION
8.1 Additional Amounts
All payments in respect of principal, premium (if any) and interest (including, without limitation, any
Optionally Deferred Interest and Equity Funded Deferred Interest) by or on behalf of the Issuer in respect
of the Securities shall be made free and clear of, and without withholding or deduction for, any taxes,
duties, assessments or governmental charges (including, without limitation, any interest, penalties and
other similar liabilities related thereto) of whatever nature imposed, levied, collected, withheld or assessed
by or within the Republic of Italy or the United States of America or any political subdivision thereof or
therein that has the power to tax (each a ‘‘Relevant Taxing Jurisdiction’’) (such amounts being hereafter
referred to as ‘‘Taxes’’), unless such withholding or deduction is required by law (including, but not limited
to, as a consequence of any change in tax law or any change in the interpretation of Tax law). In such event
the Issuer shall pay such additional amounts (‘‘Additional Amounts’’) as will result in the receipt by the
Securityholders (which for all purposes of this Condition 8 shall include the beneficial owners of the
Securities) of the same amounts as would have been received by them had no such withholding or
deduction been required; except that no such Additional Amounts shall be due from the Issuer to the
extent that the relevant Tax is a direct result of one or more of the following circumstances:
(a) Other connection
in respect of any Securityholder who is liable to such Taxes by reason of his having some present
or future connection with the Relevant Taxing Jurisdiction (other than by reason of (i) the mere
receipt or holding of the Security or (ii) the mere receipt of payments under the Securities); or
(b) Declaration of non-residence or other exemption claim
in respect of any Securityholder who would not be liable or subject to the withholding or
deduction by making a declaration (including, without limitation, a U.S. Internal Revenue Service
Form W-8 BEN or W-9) of non-residence or other similar claim for exemption (in each case,
which the relevant Securityholder was legally entitled to make) to the relevant tax authority after
notification by the Issuer of the requirement to comply with the same (which notification shall be
accomplished by providing written notice of the same to the Trustee, the Principal Paying and
Transfer Agent and the relevant clearing systems and by publication of an appropriate notice in at
least two international economic newspapers, which publication shall be made at a time which
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would enable the Securityholders, acting reasonably, to comply with such requirement, provided
that Securityholders shall be deemed to have received notification of any such requirement to
make a declaration or similar claim to the extent that such requirement is described under the
heading ‘‘Tax Considerations—Italian Tax Considerations’’ in the Offering Circular dated May 10,
2006, in relation to the Securities); or
(c) Presentation more than 30 days after the Relevant Date
in respect of any Certificate presented for payment (where presentation is required) more than
30 days after the Relevant Date except to the extent that the Securityholder thereof would have
been entitled to such Additional Amounts on presenting such Certificate for payment on the last
day of such period of 30 days; or
(d) Imposta sostitutiva levied pursuant to Decree No. 239
where such withholding or deduction is in relation to the substitute tax (imposta sostitutiva),
currently levied at the rate of 12.5%, regulated by Italian Legislative Decree No. 239 of April 1,
1996, as amended or supplemented (‘‘Decree 239’’), except where the exemption provided for by
Decree No. 239 is not applicable due to any action or omission of the Issuer; or
(e) European Council Directive
where such withholding or deduction is imposed on a payment to an individual and is required to
be made pursuant to European Council Directive 2003/48/EC or any Directive implementing the
conclusions of the ECOFIN Council meeting of November 26-27, 2000 on the taxation of savings
income or any other law implementing or complying with, or introduced in order to conform to,
such Directive; or
(f) Payment by another Paying and Transfer Agent
in respect of any Certificate presented for payment (where presentation is required) by or on
behalf of a Securityholder who would have been able to avoid such withholding or deduction by
presenting the relevant Certificate to another Paying and Transfer Agent in a Member State of
the European Union; or
(g) U.S. Backup Withholding
where such withholding or deduction is in respect of backup withholding imposed under
Section 3406 of the United States Internal Revenue Code of 1986, as amended (the ‘‘Code’’) and
the U.S. Treasury regulations thereunder.
Such Additional Amounts will also not be payable where, had the beneficial owner of the Security
been the registered Securityholder, it would not have been entitled to payment of Additional Amounts by
reason of Conditions 8.1(a) to (g) (inclusive) above.
The Issuer will (i) make such withholding or deduction required by applicable law and (ii) remit the
full amount withheld or deducted to the relevant taxing authority in accordance with applicable law.
At least 30 calendar days prior to each date on which any payment under or with respect to the
Securities is payable, if the Issuer will be obliged to pay Additional Amounts with respect to such payment
(unless such obligation to pay Additional Amounts arises after the 30th day prior to the date on which
payment under or with respect to the Securities is payable, in which case it will be promptly thereafter), the
Issuer will deliver to the Trustee an Officer’s Certificate of the Issuer stating that such Additional Amounts
will be payable and the amounts so payable and will set forth such other information necessary to enable
the Trustee, the Registrar or the Paying and Transfer Agent, as the case may be, to pay such Additional
Amounts to Securityholders on the relevant payment date. The Trustee shall, without further investigation,
be entitled to rely absolutely on each such Officer’s Certificate as conclusive proof that such payments are
necessary. The Issuer will promptly publish a notice in accordance with the provisions set forth in
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revaluation is credited directly to equity under revaluation surplus, unless it reverses a revaluation decrease
for the same asset that was previously recognised as an expense. In such a case, the increase is recognised
in the income statement. A revaluation decrease is charged directly against any related revaluation surplus
for the same asset, with any excess being recognised as an expense.
As a first-time adopter of IFRS, an entity may elect to measure an item of PP&E at the date of
transition to IFRSs at its fair value and use that fair value as its deemed cost at that date.
Under U.S. GAAP, PP&E is carried at cost less accumulated depreciation and impairment.
Revaluations of PP&E are not permitted.
Impairment of Assets
Under IFRS, an entity must assess annually whether there are any indications that an asset may be
impaired. If there is any such indication, the assets are tested for impairment. An impairment loss is
recognised in the income statement when an asset’s carrying amount exceeds its recoverable amount
(although an impairment loss may be offset against a revaluation surplus to the extent it relates to the same
asset). IFRS requires reversal of an impairment loss when there has been a change in economic conditions
or in the expected use of the asset.
Under U.S. GAAP, an asset is tested for impairment whenever events and circumstances indicate that
the carrying amount of the asset may not be recoverable. When an impairment is indicated, the
impairment is first measured by comparing undiscounted future cash-flows to the carrying value of the
asset. If impairment exists, the impairment loss is the excess of the asset’s carrying value over its fair value.
The impairment loss results in a new cost basis for the asset. Reversals of impairment losses for assets to be
held and used are prohibited.
Business Combinations
A business combination involves bringing together separate entities into one economic entity. An
acquisition is where one of the combining entities obtains control over the other, enabling a purchaser to
be identified.
Under IFRS, business combinations are accounted for as acquisitions and the purchase method of
accounting must be used to portray the financial effect of an acquisition. A business combination is
reflected in the financial statements at the date of consummation, which is the date the purchaser obtains
control of the acquisition target. Specific IFRS guidance about business combinations excludes from its
scope transactions among entities under common control. At the transition date, a first time adopter of
IFRS has the possibility to apply certain exemptions to the purchase method with respect to the business
combinations consummated before the transition date.
U.S. GAAP requires the use of the purchase method of accounting for all business combinations
between unrelated parties. A business combination is reflected in the financial statements at the date of
consummation. Under U.S. GAAP, shares issued as consideration are measured at their fair market price
over a reasonable period of time (interpreted to be a few days) before and after the parties reach an
agreement on the purchase price and the proposed transaction is announced.
Goodwill
Goodwill is the difference between the cost of an acquisition and the fair value of identifiable assets
and liabilities acquired. Positive goodwill is capitalised as an intangible asset.
Under IFRS for business combinations agreed to prior to March 31, 2004, goodwill is amortised over
the estimated useful life, not to exceed 20 years except in very rare cases. Goodwill is reviewed for
F-3
reasonable opinion of the Trustee, capable of remedy, remains unremedied for 60 days or such
longer period as the Trustee may agree after the Trustee has given notice thereof to the Issuer;
(d) any petition is filed by any third party in connection with any Insolvency Proceedings in respect of
the Issuer, and such petition is not dismissed within 180 days of such filing; or
(e) an order is made or a resolution is passed for the voluntary or involuntary liquidation, dissolution
or winding up of, or an administrative and/or court order is made for any Insolvency Proceedings
in respect of, the Issuer, or the Issuer takes any corporate action for the purposes of opening, or
initiates or consents to, Insolvency Proceedings in respect of it.
9.2 Enforcement in respect of Optionally Deferred Interest
Upon the occurrence of an Enforcement Event described in Condition 9.1(a) and subject to
mandatory provisions of applicable law, the Trustee at its discretion may, and if so instructed by
Securityholders holding not less than 25% in aggregate principal amount of the outstanding Securities or if
so directed by an Extraordinary Resolution (as defined in the Trust Deed) shall, subject in each case to its
being indemnified and/or secured to its satisfaction, by written notice addressed to the Issuer, institute
proceedings to obtain payment of the amounts due, provided that the Issuer shall not by virtue of the
institution of any such proceedings be obliged to pay any sum or sums sooner than the same would
otherwise have been payable by it and the Trustee shall not, in these circumstances, be entitled to declare
the principal amount of the Securities due and payable.
The proviso to this Condition 9.2 shall not apply to amounts due to the Trustee in its personal capacity
under the Trust Deed.
9.3 Enforcement in respect of Equity Funded Deferred Interest and Capital Restriction
Upon the occurrence of an Enforcement Event described in Condition 9.1(b) above and subject to
Condition 12.1 and mandatory provisions of applicable law, the Trustee at its discretion may, and if so
instructed by Securityholders holding not less than 25% in aggregate principal amount of the outstanding
Securities or if so directed by an Extraordinary Resolution shall, subject in each case to it being
indemnified and/or secured to its satisfaction, (a) give notice to the Issuer that the Securities are, and they
shall accordingly forthwith become, immediately due and repayable at their principal amount, together
with any accrued and unpaid Scheduled Interest Amount, any Deferred Interest and any Additional
Amounts thereon, and/or (b) institute steps in order to obtain a judgment against the Issuer for any
amounts due in respect of the Securities, including the institution of Insolvency Proceedings.
9.4 Enforcement in respect of Breach of Other Obligations
Upon the occurrence of an Enforcement Event described in Condition 9.1(c) above or upon the
breach by the Issuer of any of its obligations under the Trust Deed and subject to mandatory provisions of
applicable law, the Trustee at its discretion may, and if so instructed by Securityholders holding not less
than 25% in aggregate principal amount of the outstanding Securities or if so directed by an Extraordinary
Resolution shall, subject in each case to it being indemnified and/or secured to its satisfaction, institute
such proceedings and/or take any other action against the Issuer as it may think fit to enforce any
obligation, condition, undertaking or provision binding on the Issuer under the Securities or the Trust
Deed (other than as provided in Conditions 9.2 and 9.3); provided that the Issuer shall not by virtue of the
institution of any such proceedings be obliged to pay any sum or sums sooner than the same would
otherwise have been payable by it and the Trustee shall not, in these circumstances, be entitled to declare
the principal amount of the Securities due and repayable.
The proviso to this Condition 9.4 shall not apply to amounts due to the Trustee in its personal capacity
under the Trust Deed.
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9.5 Enforcement in respect of Insolvency Proceedings
Upon the occurrence of an Enforcement Event described in Condition 9.1(d) or (e) above and subject
to Condition 12.1 and mandatory provisions of applicable law, the Trustee at its discretion may, and if so
instructed by Securityholders holding not less than 25% in aggregate principal amount of the outstanding
Securities or if so directed by an Extraordinary Resolution shall, subject in each case to it being
indemnified and/or secured to its satisfaction, (a) give notice to the Issuer that the Securities are, and they
shall accordingly forthwith become, immediately due and repayable at their principal amount, together
with any accrued and unpaid Scheduled Interest Amount, any Deferred Interest and any Additional
Amounts thereon, and/or (b) institute steps in order to obtain a judgment against the Issuer for any
amounts due in respect of the Securities, including filing a proof of claim and participating in the relevant
Insolvency Proceedings or proceedings for the liquidation, dissolution or winding-up of the Issuer.
9.6 Non-Payment of Principal
If the Issuer shall default in the payment of principal or premium in respect of any Security which has
become due and repayable, or fails to redeem the Securities when obliged to do so, in each case in
accordance with the terms hereof, the Trustee at its discretion may, and if so instructed by Securityholders
holding not less than 25% in aggregate principal amount of the outstanding Securities or if so directed by
an Extraordinary Resolution (as defined in the Trust Deed) shall, subject in each case to its being
indemnified and/or secured to its satisfaction, institute proceedings to obtain payment of the amounts due,
including the institution of Insolvency Proceedings.
9.7 Other Remedies and Rights of Securityholders
No remedy against the Issuer other than the institution of the steps or the proceedings or taking of
other action by the Trustee referred to in Conditions 9.2, 9.3, 9.4, 9.5 and 9.6, subject to mandatory
provisions of applicable law (including, without limitation, Article 2419 of the Italian Civil Code), shall be
available to the Trustee or the Securityholders whether for the recovery of amounts owing in respect of the
Securities or in respect of any breach by the Issuer of any other obligation, condition, or provision binding
on it under the Securities or the Trust Deed, provided that the second paragraph of Conditions 9.2 and 9.4
shall apply to this Condition 9.7.
9.8 Holders not entitled to proceed directly
No Securityholder shall, subject to mandatory provisions of applicable law (including, without
limitation, Article 2419 of the Italian Civil Code), be entitled to proceed directly against the Issuer unless
the Trustee, having become bound so to proceed, fails to do so within a reasonable period and such failure
is continuing.
10. PRESCRIPTION
Claims against the Issuer for payment in respect of the Securities shall be prescribed and become void
unless made within a period of 10 years (in the case of principal) or five years (in the case of interest) from
the appropriate Relevant Date in respect of such payment and thereafter any principal, interest or other
sums payable in respect of such Securities shall be forfeited and revert to the Issuer.
11. REPLACEMENT OF CERTIFICATES
If any Certificate is lost, stolen, mutilated, defaced or destroyed it may be replaced at the specified
office of the Paying and Transfer Agent in Luxembourg (for so long as the Securities are listed on the
Luxembourg Stock Exchange, otherwise at the specified office of the Registrar) subject to all applicable
laws and stock exchange or other relevant authority requirements, upon payment by the claimant of the
expenses incurred in connection with such replacement and on such terms as to evidence, security,
indemnity and otherwise as the Issuer may require (provided that the requirement is reasonable in the
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light of prevailing market practice). Mutilated or defaced Certificates must be surrendered before
replacements will be issued.
12. MEETINGS OF SECURITYHOLDERS, MODIFICATION AND WAIVER
12.1 Meetings of Securityholders
The Trust Deed contains provisions for convening meetings of Securityholders to consider any matter
affecting their interests, including a modification of any of these Conditions or any provisions of the Trust
Deed in accordance with Article 2415 of the Italian Civil Code and any other applicable provisions of law.
Any such modification may be made if sanctioned by an Extraordinary Resolution. Such a meeting may be
convened by the board of directors of the Issuer or by the Securityholders’ Representative and shall be
convened upon the request in writing of Securityholders holding not less than 5% in aggregate principal
amount of the Securities for the time being outstanding. Such a meeting will be validly held if (a) there are
one or more persons present, being or representing Securityholders holding at least one half of the
aggregate principal amount of the Securities for the time being outstanding, or (b) at any adjourned
meeting, following adjournment of the first meeting for lack of quorum, there are one or more persons
present being or representing Securityholders holding more than one third of the aggregate principal
amount of the Securities for the time being outstanding, or (c) in the case of a third meeting following a
further adjournment for lack of quorum, there are one or more persons present being or representing
Securityholders holding at least one-fifth of the aggregate principal amount of the Securities for the time
being outstanding, provided, however, that if the business of such meeting includes consideration of
proposals, inter alia, (i) to modify the Maturity Date or the dates on which, or manner in which, interest is
payable in respect of the Securities, (ii) to reduce or cancel the principal amount of, or interest on or to
vary the method of calculating the rate of interest on, the Securities, (iii) to change the currency of
payment of the Securities, (iv) to modify the provisions relating to status, (v) to modify the provisions
concerning the quorum required at any meeting of Securityholders or the majority required to pass an
Extraordinary Resolution or (vi) relating to any other matters provided under Article 2415 paragraph 3, of
the Italian Civil Code (each, a ‘‘Reserved Matter’’), the necessary quorum shall always be at least one half of
the aggregate principal amount of the Securities for the time being outstanding. The majority required to
pass a resolution at any meeting convened to vote on an Extraordinary Resolution (including any meeting
convened following adjournment of the previous meeting for want of quorum) shall be one or more
persons present being or representing Securityholders holding at least two thirds of the aggregate principal
amount of the Securities represented at the meeting; provided, however, that a Reserved Matter may only
be sanctioned by an Extraordinary Resolution passed at a meeting of Securityholders by one or more
persons present being or representing Securityholders holding at least one half of the aggregate principal
amount of the Securities for the time being outstanding. Any Extraordinary Resolution duly passed shall
be binding on all Securityholders (whether or not they were present at the meeting at which such
resolution was passed).
All Extraordinary Resolutions shall be recorded pursuant to Article 2415 of the Italian Civil Code.
12.2 Securityholders’ Representative
A representative of Securityholders (the ‘‘Securityholders’ Representative’’, or rappresentante comune,
who might, subject to mandatory provisions of Italian law, also be the same legal entity as the Trustee) can
be appointed pursuant to Article 2417 of the Italian Civil Code. If the Securityholders’ Representative is
not appointed by a meeting of Securityholders, the Securityholders’ Representative shall be appointed by a
decree of the President of the Court where the Issuer has its registered office at the request of one or more
Securityholders, or at the request of the board of directors of the Issuer. The Securityholders’
Representative shall remain appointed for a maximum period of three years, but may be re-appointed for a
further three year period thereafter.
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12.3 Modification and Waiver
The Trustee may agree, without the consent of the Securityholders, to (i) any modification of any of
the provisions of the Trust Deed or the Intercreditor Agreement which, in its opinion, is of a formal, minor
or technical nature or is made to correct a manifest error, and (ii) any other modification, and any waiver
or authorisation of any breach or proposed breach, of any of the provisions of the Trust Deed (except a
Reserved Matter) which is in the opinion of the Trustee not materially prejudicial to the interests of the
Securityholders. Any such modification, authorisation or waiver shall be binding on the Securityholders
and, if the Trustee so requires, such modification, authorisation or waiver shall be notified to the
Securityholders as soon as practicable in accordance with Condition 15.
12.4 Entitlement of the Trustee
In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including,
without limitation, any modification, waiver, authorisation or determination), the Trustee shall have regard
to the general interests of Securityholders as a class but shall not have regard to any interests arising from
circumstances particular to individual Securityholders (whatever their number) and, in particular but
without limitation, shall not have regard to the consequences of any such exercise for individual
Securityholders (whatever their number) resulting from their being for any purpose domiciled or resident
in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political
sub-division thereof and the Trustee shall not be entitled to require, nor shall any Securityholder be
entitled to claim, from the Issuer, the Trustee or any other person any indemnification or payment in
respect of any tax consequence of any such exercise upon individual Securityholders except to the extent
already provided for in Condition 8 and/or any undertaking given in addition to, or in substitution for,
Condition 8 pursuant to the Trust Deed.
13. INDEMNIFICATION OF THE TRUSTEE
The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from
responsibility. The Trustee is entitled to enter into business transactions with the Issuer and any entity
related to the Issuer without accounting for any profit.
14. FURTHER ISSUES
The Issuer may from time to time without the consent of the Securityholders create and issue further
securities having the same terms and conditions as the Securities in all respects (or in all respects except
for the first payment of interest on them) and so that such further issue shall be consolidated and form a
single series with, and have the same ISIN and Common Code numbers as, the Securities. References in
these Conditions to the Securities include (unless the context requires otherwise) any such securities and
forming a single series with the Securities. Any further securities forming a single series with the Securities
shall be constituted by a deed supplemental to the Trust Deed.
15. NOTICES
Notices to Securityholders shall be validly given when: (i) delivered in person or when sent by first
class registered or certified mail, postage pre-paid, to them at their respective addresses as set out in the
Register; or (ii) so long as the Securities are listed on the Luxembourg Stock Exchange and the rules of
that stock exchange so require, notices will be published in a leading newspaper having general circulation
in Luxembourg (which is expected to be d’Wort) provided, however, that any notice relating to the calling of
a meeting of Securityholders pursuant to Condition 12 shall also be published in the Gazzetta Ufficiale of
the Republic of Italy or in a daily newspaper as specified in the by-laws of the Issuer and having general
circulation in the Republic of Italy, at least 30 days prior to the meeting (exclusive of the day on which the
notice is published and of the day on which the meeting is to be held). Any notice shall be deemed to have
285
been given on the date of publication or, if published more than once or on different dates, on the first
date on which publication is made in all required publications, provided that, if notices are mailed, such
notice shall be deemed to have been given on the later of such publication and the fifth day after being so
mailed. Failure to mail a notice or communication to any holder, or any defect in any such notice or
communication, shall not affect its validity with respect to other holders. If a notice or communication is
mailed in the manner provided above, it shall be deemed validly given, whether or not the addressee
receives it.
While any Securities are represented by a Global Certificate, notices may be delivered to Euroclear
and Clearstream, Luxembourg, each of which shall give notice of such notice to holders of Book-Entry
Interests instead of publication as described above.
16. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
No person shall have any right to enforce any term or condition of the Securities under the Contracts
(Rights of Third Parties) Act 1999.
17. GOVERNING LAW
17.1 Governing Law
The Trust Deed and the Securities are governed by and shall be construed in accordance with English
law, save that Conditions 2 and 12.1, and Clause 2.4 of the Trust Deed, are governed by and shall be
construed in accordance with the laws of the Republic of Italy, and are subject to mandatory provisions of
Italian law.
17.2 Jurisdiction
The courts of England are to have non-exclusive jurisdiction to settle any disputes which may arise out
of or in connection with the Securities and accordingly any legal action or proceedings arising out of or in
connection with the Securities (‘‘Proceedings’’) may be brought in such courts. The Issuer has in the Trust
Deed irrevocably submitted to the non-exclusive jurisdiction of such courts.
17.3 Agent for Service of Process
The Issuer has irrevocably appointed an agent in England to receive service of process in any
Proceedings in England based on any of the Securities or the Trust Deed.
18. DEFINITIONS
‘‘Acquisition’’ means the acquisition by Gold Acquisition Corp. of the all of the outstanding shares in
the share capital of GTECH Holdings Corporation (‘‘GTECH’’) on the terms of the Merger Agreement
and any other related documents. ‘‘Additional Amounts’’ has the meaning given to it in Condition 8.
‘‘Additional Taxing Jurisdiction’’ has the meaning given to it in Condition 8.
‘‘Advance Capital Contributions’’ means any irrevocable, unconditional and non-reimbursable (except
upon the voluntary or involuntary liquidation, dissolution or winding-up of, the Issuer) capital contribution
made or to be made by a shareholder of the Issuer (versamento in conto futuro aumento di capitale).
‘‘Agent Bank’’ has the meaning given to it in the preamble.
‘‘Annual General Meeting’’ means the shareholders’ meeting of the Issuer convened for the purpose of
approving its annual financial statements and, in accordance with these Conditions, the authorisation and
issuance of ordinary shares of the Issuer.
286
‘‘Audited Accounts’’ means, as at a Test Date, the most recent annual consolidated audited financial
statements of the Issuer Group taken as a whole, prepared in accordance with IFRS and having been
approved by the board of directors of the Issuer and filed with the competent companies’ registrar.
‘‘Authorised Denomination’’ has the meaning given to it in Condition 1.1.
‘‘Authorised Equity’’ means from time to time, ordinary shares authorised for issuance pursuant to a
resolution approved and adopted by the shareholders of the Issuer or, to the extent delegated by such
resolution, the board of directors of the Issuer, in connection with the Securities.
‘‘Benchmark Rate’’ means 0.75% plus the annualised offer yield to maturity, as calculated by the Agent
Bank to be the average of three market quotations, of the then current Euro government benchmark
security selected by the Agent Bank, after consultation with the Issuer, as having a maturity comparable to
the remaining term of the Securities to the Reset Date that would be used, at the time of selection and in
accordance with customary financial practice, in pricing new issues of corporate debt securities of a
comparable maturity to the Reset Date.
‘‘Book-Entry Interests’’ has the meaning given to it in Condition 1.
‘‘business day’’ means, except in Conditions 1 and 7, a day which is both a day on which commercial
banks and foreign exchange markets settle payment and are open for general business (including dealing in
foreign exchange and foreign currency deposits) in London and Milan and a day on which the TARGET
System is operating.
‘‘Capital Expenditure’’ means the amount in euros of capital expenditure incurred by the Issuer Group in
respect of the annual financial period ending on the date of the relevant Audited Accounts, as determined
in accordance with such Audited Accounts.
‘‘Capital Payment’’ means:
(a) the redemption, repurchase or acquisition of any Parity Securities, or Junior Obligations for any
consideration, other than (i) in connection with any existing or future employee benefit plan,
directors’ and senior management’s stock based compensation, directors’ stock option plan or
similar arrangement; or (ii) a reclassification of Issuer Equity or exchange or conversion of one
class or series of Issuer Equity into another class or series of Issuer Equity; or (iii) the purchase of
fractional interests in Parity Securities or Junior Obligations pursuant to any conversion or
exchange provisions of such Parity Securities or Junior Obligations; or
(b) the declaration or payment of, or the resolution of, a dividend or distribution or any other similar
payment with respect to any Distribution Parity Securities or Junior Obligations, other than a
payment in the form of Issuer Equity.
‘‘Capital Restriction’’ has the meaning given to it in Condition 5.4.
A ‘‘Change of Control’’ will be deemed to have occurred if after the Issue Date any person or persons
acting in concert or any person or persons acting on behalf of such persons(s) become a Majority Holder
(whether or not any necessary approvals therefor have been obtained) provided that a Change of Control
shall not be deemed to have occurred if the Principal Shareholder continues, without interruption, to be
the Majority Holder.
A ‘‘Change of Control Downgrade’’ shall be deemed to have occurred if a relevant Rating Agency
publicly announces that in connection with, anticipation of or as a result of, a Change of Control occurring,
the Corporate Credit Rating or Corporate Family Rating assigned to the Issuer by such Rating Agency is
withdrawn, or downgraded to a rating of or below BB+ by S&P or Ba1 by Moody’s (or their respective
equivalents at such time).
287
A ‘‘Change of Control Event’’ shall be deemed to have occurred on the earliest date on which both a
Change of Control Downgrade and the respective Change of Control have occurred.
‘‘Change of Control Fixed Rate’’ means the Fixed Interest Rate plus an additional margin of 5% per
annum or, if lower, the maximum rate permitted by then applicable Italian law.
‘‘Change of Control Floating Rate’’ means, in respect of a Floating Rate Interest Period, the relevant
Floating Interest Rate determined in accordance with Conditions 3.3 and 3.4, plus an additional margin of
5% per annum or, if lower, the maximum rate permitted by then applicable Italian law.
‘‘Clearstream, Luxembourg’’ has the meaning given to it in Condition 1.
‘‘Code’’ has the meaning given to it in Condition 8.
‘‘Common Depositary’’ has the meaning given to it in Condition 1.
‘‘Corporate Credit Rating’’ means the corporate credit rating assigned from time to time to the Issuer by
S&P, representing the highest rating that S&P may assign to any unsecured obligation of any member of
the Issuer Group, and being on the Issue Date, BBB.
‘‘Corporate Family Rating’’ means the corporate family rating assigned from time to time to the Issuer by
Moody’s, representing the highest rating that Moody’s may assign to any unsecured obligation of any
member of the Issuer Group, and being on the Issue Date, Baa3.
‘‘Coverage Ratio’’ means the ratio (to be calculated to the fourth decimal place, with 0.00005 being
rounded upwards) of (a) Free Cash-flow Before Debt Service, divided by (b) Interest Expense, in each case
in respect of the annual financial period ending on the date of the relevant Audited Accounts.
‘‘Decree 239’’ has the meaning given to it in Condition 8.
‘‘Definitive Certificates’’ has the meaning given to it in Condition 1.
‘‘Deferred Interest’’ means any unpaid Optionally Deferred Interest and any unpaid Equity Funded
Deferred Interest.
‘‘Distribution Parity Securities’’ means any securities (including Liquidation Parity Securities) or other
instruments issued, entered into or guaranteed by the Issuer which, in each case, by their terms or by
operation of law, constitute obligations of the Issuer to make periodic payments, taking into account
provisions for the Issuer to suspend or defer such payments at its discretion or subject to certain
conditions, that are substantially the same as those of the Securities.
‘‘Early Redemption Date’’ means any date fixed for redemption of the Securities (other than the Maturity
Date) in accordance with the provisions of Condition 6.
‘‘EBITDA’’ means the amount in euros of the consolidated net pre-taxation profits of the Issuer
Group, as adjusted by (without double counting):
(a) adding back the amount of Interest Expense;
(b) adding back the amount of depreciation and amortisation expense, if any;
(c) eliminating the effect of any extraordinary item or any non-cash items;
(d) eliminating the effect of any revaluation of an asset, or any loss or gain on the disposal of an asset
(otherwise than in the ordinary course of trading); and
(e) excluding the amount of any EBITDA attributable to minority shareholders in members of the
Issuer Group,
in each case, in respect of the annual financial period ending on the date of the relevant Audited Accounts
and as determined in accordance with such Audited Accounts.
288
‘‘Enforcement Event’’ has the meaning given to it in Condition 9.1.
‘‘Equity Funded Deferred Interest’’ has the meaning given to it in Condition 4.3.
‘‘Equity Funded Deferred Interest Payment Date’’ has the meaning given to it in Condition 5.2(ii).
‘‘ESOP Cashflow’’ means the cash amount, in euros, if any, received by the Issuer or any member of the
Issuer Group in respect of the exercise of stock options by employees in respect of the annual financial
period ending on the date of the relevant Audited Accounts, as determined in accordance with such
Audited Accounts.
‘‘EURIBOR’’ has the meaning given to it in Condition 3.3(a).
‘‘Euro-zone’’ means the region comprised of Member States of the European Union that adopt or have
adopted the single currency in accordance with the Treaty establishing the European Community, as
amended by the Treaty on the European Union.
‘‘Euroclear’’ has the meaning given to it in Condition 1.
‘‘Fixed Interest Rate’’ has the meaning given to it in Condition 3.1.
‘‘Fixed Rate Interest Amount’’ has the meaning given to it in Condition 3.1.
‘‘Fixed Rate Interest Period’’ has the meaning given to it in Condition 3.1.
‘‘Fixed Rate Payment Date’’ has the meaning given to it in Condition 3.1.
‘‘Floating Interest Rate’’ has the meaning given to it in Condition 3.2.
‘‘Floating Rate Interest Amount’’ has the meaning given to it in Condition 3.2.
‘‘Floating Rate Interest Period’’ has the meaning given to it in Condition 3.2.
‘‘Floating Rate Payment Date’’ has the meaning given to it in Condition 3.2.
‘‘Free Cash-flow Before Debt Service’’ means EBITDA plus ESOP Cashflow less Capital Expenditure less
Taxes Paid, in each case in respect of the annual financial period ending on the date of the relevant
Audited Accounts.
‘‘Global Certificates’’ has the meaning given to it in Condition 1.
‘‘IFRS’’ means the International Financial Reporting Standards issued by the International
Accounting Standards Board, as from time to time adopted by the European Commission for use in the
European Union.
‘‘Insolvency Law’’ means Royal Decree No. 267 of March 16, 1942, as amended and supplemented from
time to time.
‘‘Insolvency Proceedings’’ means any insolvency proceedings or proceedings equivalent or analogous
thereto including, but not limited to, temporary extraordinary administration (gestione provvisoria),
bankruptcy (fallimento), arrangement with creditors (concordato preventivo), adjustment of creditors’
claims (concordato fallimentare), controlled administration (amministrazione controllata), forced
administrative liquidation (liquidazione coatta amministrativa), extraordinary administration
(amministrazione straordinaria) and extraordinary administration of large companies in insolvency
(amministrazione straordinaria delle grandi imprese in stato di insolvenza), as set out in the Insolvency Law
and/or any other applicable law.
‘‘Interest Determination Date’’ has the meaning given to it in Condition 3.3(a).
‘‘Interest Expense’’ means the amount of (a) the expense relating to interest and amounts in the nature of
interest, discount, acceptance and commitment fees, amounts payable under interest rate hedging
289
agreements and the interest element of payments under finance leases (including interest expense relating
to the Securities), less (b) the income relating to interest and amounts in the nature of interest or
premium, or amounts receivable under interest rate hedging agreements, in each case in respect of the
annual financial period ending on the date of the relevant Audited Accounts, as determined in accordance
with such Audited Accounts, plus (c) the amount of accrued but unpaid Deferred Interest, if any, as of the
relevant Test Date.
‘‘Interest Payment Date’’ has the meaning given to it in Condition 3.2.
‘‘Interest Period’’ has the meaning given to it in Condition 3.2.
‘‘Issue Date’’ means May 17, 2006.
‘‘Issuer Equity’’ means all present or future ordinary share capital and Advance Capital Contributions of
the Issuer.
‘‘Issuer Group’’ means the Issuer and its consolidated subsidiaries.
‘‘Junior Obligations’’ has the meaning given to it in Condition 2.
‘‘Liquidation Parity Securities’’ means any securities (including Distribution Parity Securities) or
instruments issued, entered into or guaranteed by the Issuer which, in each case, rank (or in relation to
which the Issuer’s payment obligations under any relevant guarantee rank), by their terms or by operation
of law, pari passu with the claims of the holders of the Securities as regards entitlement to distributions
representing principal on the voluntary or involuntary liquidation, dissolution or winding up of the Issuer.
‘‘Majority Holder’’ means the beneficial owner, directly or indirectly, of:
(a) more than 50% of the ordinary share capital of the Issuer; or
(b) such number of shares in the capital of the Issuer carrying more than 50% of the voting rights
pursuant to Article 105 of the 1998 Financial Act (Legislative Decree No. 58/1998).
‘‘Make-Whole Price’’ means, per Security, the higher of (a) the principal amount of such Security and
(b) the Net Present Value.
‘‘Mandatorily Deferred Interest’’ has the meaning given to it in Condition 4.2.
‘‘Mandatory Redemption Date’’ means the date which is twenty business days following the occurrence of
a Mandatory Redemption Event.
A ‘‘Mandatory Redemption Event’’ shall occur if the Acquisition does not occur by October 10, 2006 or,
if earlier, the Merger Agreement is terminated in accordance with its terms.
‘‘Margin’’ means 5.05% per annum.
‘‘Market Disruption Event’’ means any one of the following events or circumstances:
(a) the occurrence of an outbreak or escalation of hostilities involving the Republic of Italy, the
United Kingdom or the United States of America, or the declaration by the Republic of Italy, the
United Kingdom or the United States of America of a national emergency or war or act of
terrorism or other material national or international calamity or crisis;
(b) the occurrence of a general banking moratorium on commercial banking activities by any relevant
author

Prospectus dated 10 May 2006 (PDF 1.79 MB)

Transcription

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